College Accounting, 13e John Ellis Price David Haddock Michael Farina (Test Bank All Chapters, 100% Original Verified, A+ Grade) Answers At The End Of Each Chapter Chapter 01 Accounting: The Language of Business True / False Questions
1. The purpose of accounting is to provide financial information about an economic or social entity. True False
2. An accounting system is designed to accumulate and classify data about a firm's financial affairs and summarize it in the general journal. True False
3. In a sole proprietorship, the owner is responsible for the debts of the business if the firm is unable to pay. True False
4. Laws passed by Congress in 1933 and 1934 gave the Securities and Exchange Commission (SEC) final say on matters of financial reporting by publicly owned corporations. True False
5. Currently, generally accepted accounting principles are developed by the American Institute of Certified Public Accountants (AICPA) True False
6. The Securities and Exchange Commission (SEC) requires that publicly owned corporations submit financial statements to it each year. True False
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Chapter 01 - Accounting: The Language of Business
7. Public accounting firms provide three major types of services: auditing, tax accounting, and management advisory services. True False
8. The financial statements and the auditor's report must be made available to stockholders of publicly owned corporations. True False
9. Anyone can invest in a closely held corporation. True False
10. Tax planning is any activity associated with the preparation of tax returns and the audit of those returns. True False
11. The separate entity assumption applies only to the corporate form of business. True False
12. As the first step in the development of generally accepted accounting principles, the FASB writes an exposure draft, which explains the topic under consideration. True False
13. Public accountants work on the staff of federal, state, or local governmental units. True False
14. The SEC uses financial information to determine a company's tax base. True False
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Chapter 01 - Accounting: The Language of Business
15. The death or withdrawal of one partner ends the partnership. True False
16. Accounting is defined as the process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties. True False
17. The owners and managers of a business are the only users of the Financial Information. True False
18. Most owners and managers rely heavily on the accountant's judgment and knowledge when making financial decisions. True False
19. Accountants provide financial information to various parties so they can make business decisions. True False
20. When a business is organized as a sole proprietorship, the owner may combine his/her personal financial information with the business financial information. True False
21. A business partnership can have only two partners. True False
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Chapter 01 - Accounting: The Language of Business
Fill in the Blank Questions
22. Accounting is often referred to as the language of ____________________. ________________________________________
23. The results of the accounting process are summarized in periodic reports called financial ____________________. ________________________________________
24. Nonprofit organizations, such as cities, public schools, and public hospitals, are referred to as ____________________ entities. ________________________________________
25. The three major legal forms of business entity are the sole proprietorship, the partnership, and the ____________________. ________________________________________
26. A partnership has ____________________ or more owners. ________________________________________
27. Ownership in a corporation is evidenced by shares of ____________________. ________________________________________
28. The Securities and Exchange Commission (SEC) regulates the accounting methods and financial reporting of ____________________ owned corporations. ________________________________________
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Chapter 01 - Accounting: The Language of Business
29. The financial statements submitted to the SEC by a corporation must be ____________________ by an independent accountant to ensure their fairness and adherence to generally accepted accounting principles. ________________________________________
30. Accountants normally choose to practice in one of three areas: public accounting, managerial accounting, or ____________________ accounting. ________________________________________
31. A form of business entity owned by one person is called a(n) ____________________. ________________________________________
32. The people, companies, or government agencies to whom a firm owes money are called ____________________. ________________________________________
33. The process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties is called ____________________. ________________________________________
34. Tax accounting is a service offered by public accounting firms that involves tax ____________________ and tax planning. ________________________________________
35. Generally accepted accounting ____________________ are financial accounting standards that are changed and refined in response to changes in the environment in which businesses operate. ________________________________________
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Chapter 01 - Accounting: The Language of Business
36. The owners of a corporation are called ____________________. ________________________________________
Multiple Choice Questions
37. Which of the following is NOT an area in which accountants usually practice? A. Public Accounting B. Industrial Accounting C. Governmental Accounting D. Managerial (Private) Accounting
38. An example of an economic entity is A. a town. B. a business. C. a nonprofit hospital. D. a church.
39. The form of a business organization that is not affected by the withdrawal or death of an owner and can continue forever is A. the sole proprietorship. B. the partnership. C. the corporation. D. the nonprofit organization.
40. Which of the following is NOT a type of information communicated by the financial statements? A. Whether or not the business is profitable B. What types of assets business owns C. How long the business has been in operation D. How much the business owes others
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Chapter 01 - Accounting: The Language of Business
41. Which of the following is NOT a type of information communicated by the financial statements? A. The equity, or value, of the business B. The amount spent on costs (expenses) of the business C. The types of products and services the business provides D. The amount of revenue earned by the business
42. The Financial Accounting Standards Board is responsible for A. auditing financial statements. B. developing generally accepted accounting principles. C. establishing accounting systems for businesses. D. making recommendations to the Securities and Exchange Commission.
43. The government agency that has final authority over the financial reporting of publicly owned corporations is A. the Securities and Exchange Commission. B. the Federal Trade Commission. C. the Internal Revenue Service. D. the Financial Accounting Standards Board.
44. The financial affairs of a business and the financial affairs of the owners should be A. combined in the firm's accounting records. B. reported in different parts of the firm's accounting records. C. combined only if the owner wants them to be. D. kept totally separate.
45. All financial statements submitted to the SEC by publicly owned corporations must include an auditor's report prepared by A. an internal auditor. B. the firm's managerial accountant. C. an independent certified public accountant. D. anyone in the accounting department.
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Chapter 01 - Accounting: The Language of Business
46. The area of accounting that involves the preparation of internal reports for a firm's executives and the analysis of the data in these reports to aid in decision making is known as A. financial accounting. B. managerial accounting. C. auditing. D. cost accounting.
47. The corporations whose stock can be bought and sold on stock exchanges and in over-thecounter markets are referred to as A. privately owned corporations. B. closely held corporations. C. publicly owned corporations. D. sole proprietorships.
48. The group of accounting educators who offer their opinions about proposed FASB statements, after research has been done to determine the possible effects on financial reporting and the economy, is A. the FCC. B. the AICPA. C. the SEC. D. the AAA.
49. Owners are not personally responsible for the debts of the business if the form of business organization is A. the sole proprietorship. B. the partnership. C. the corporation. D. the nonprofit organization.
50. A firm issues periodic reports called A. financial statements. B. summaries. C. tax returns. D. audits.
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Chapter 01 - Accounting: The Language of Business
51. Which of the following is NOT part of the process of accounting for financial information? A. Recording B. Identifying C. Communicating D. Classifying
52. Which of the following is NOT a service of public accounting firms? A. Auditing B. Tax accounting C. Management advisory services D. Investment services
53. Tax accounting involves tax compliance and A. tax evaluation. B. tax planning. C. tax configuration. D. tax obfuscation.
54. Tax planning includes A. preparing tax returns. B. auditing tax returns. C. correcting tax returns. D. suggesting actions to reduce tax liability.
55. Managerial accounting is A. public accounting. B. government accounting. C. private accounting. D. tax accounting.
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Chapter 01 - Accounting: The Language of Business
56. The following are all government agencies except A. SEC. B. AICPA. C. IRS. D. FBI.
57. An act passed in response to the wave of corporate accounting scandals is the A. Saxon-Ordanly Act. B. Sarbanes-Oxley Act. C. Sardonic-Oxone Act. D. Sorbine-Oxide Act.
58. Owners and managers need financial information in order to A. grant loans. B. issue credit. C. collect taxes. D. make decisions.
59. The Sarbanes-Oxley Act includes rules on A. auditor retention. B. auditor reliability. C. auditor rotation. D. auditor reporting.
60. A form of the partnerships business entity is A. LLP. B. LLC. C. INC. D. DBA.
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Chapter 01 - Accounting: The Language of Business
61. The FASB develops Statements of Financial Accounting Standards in the following order A. issues an exposure draft, obtains responses to the exposure draft, issues a statement of principle, issues a discussion memorandum, obtains responses to the discussion memorandum B. issues a discussion memorandum, obtains responses to the discussion memorandum, issues an exposure draft, obtains responses to the exposure draft, issues a statement of principle C. issues a discussion memorandum, obtains responses to the discussion memorandum, issues a statement of principle, issues an exposure draft, obtains responses to the exposure draft D. issues a statement of principle, issues a discussion memorandum, obtains responses to the discussion memorandum, issues an exposure draft, obtains responses to the exposure draft
62. The review of financial statements to assess their fairness and adherence to GAAP is A. accounting. B. preparation. C. compliance. D. auditing.
63. Management advisory services are designed to help A. government agencies. B. clients. C. employers. D. creditors.
64. An independent accountant who provides accounting services to the public for a fee is a A. CIA. B. CFE. C. CMA. D. CPA.
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Chapter 01 - Accounting: The Language of Business
Short Answer Questions
65. What is the "language of business?" List three groups who use this financial information.
66. Cullen Company of country X and Shaw Industries of country Y have issued financial statements in compliance with the accounting principles of their respective countries. They would like to work together on a project and need to compare their current financial statements prior to beginning. However, the accounting principles of the two countries differ. What organization might they turn to regarding this issue? (Give both the full name of the organization and its acronym.) What is the function of this organization?
67. You have just entered college and decide to pursue a career as an accountant. What are the three areas in which an accountant can practice?
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Chapter 01 - Accounting: The Language of Business
68. There are three general services public accountants offer. List and briefly describe each.
69. List at least five activities performed by managerial accountants.
70. Discuss the differences among: entity, economic entity, and social entity.
71. How do sole proprietorships, partnerships, and corporations differ?
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Chapter 01 - Accounting: The Language of Business
72. List three individuals or groups who use financial information to make decisions about a firm. For each listed, give an example of why they would need the information.
73. List the "Big Four" public accounting firms in the United States.
74. Audited financial statements include an auditor's report. What does this auditor's report contain?
75. List at least three of the provisions of the Sarbanes-Oxley Act.
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Chapter 01 - Accounting: The Language of Business
76. Explain the process the Financial Accounting Standards Board (FASB) employs to develop and issue Statements of Financial Accounting Standards.
77. What determines the independence of Certified Public Accountants (CPAs)?
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Chapter 01 - Accounting: The Language of Business
Chapter 01 Accounting: The Language of Business Answer Key
True / False Questions
1. The purpose of accounting is to provide financial information about an economic or social entity. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-01 Define accounting. Level: Easy Topic: What is Accounting?
2. An accounting system is designed to accumulate and classify data about a firm's financial affairs and summarize it in the general journal. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-01 Define accounting. Learning Objective: 01-06 Define the accounting terms new to this chapter. Level: Easy Topic: What is Accounting?
3. In a sole proprietorship, the owner is responsible for the debts of the business if the firm is unable to pay. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Learning Objective: 01-06 Define the accounting terms new to this chapter. Level: Easy Topic: Business and Accounting
1-16 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 01 - Accounting: The Language of Business
4. Laws passed by Congress in 1933 and 1934 gave the Securities and Exchange Commission (SEC) final say on matters of financial reporting by publicly owned corporations. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 01-03 Identify the users of financial information. Level: Medium Topic: What is Accounting?
5. Currently, generally accepted accounting principles are developed by the American Institute of Certified Public Accountants (AICPA) FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Level: Easy Topic: Business and Accounting
6. The Securities and Exchange Commission (SEC) requires that publicly owned corporations submit financial statements to it each year. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Level: Easy Topic: Business and Accounting
7. Public accounting firms provide three major types of services: auditing, tax accounting, and management advisory services. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Level: Easy Topic: What is Accounting?
1-17 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 01 - Accounting: The Language of Business
8. The financial statements and the auditor's report must be made available to stockholders of publicly owned corporations. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Level: Medium Topic: Business and Accounting
9. Anyone can invest in a closely held corporation. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Medium Topic: Business and Accounting
10. Tax planning is any activity associated with the preparation of tax returns and the audit of those returns. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Level: Medium Topic: What is Accounting?
11. The separate entity assumption applies only to the corporate form of business. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Learning Objective: 01-06 Define the accounting terms new to this chapter. Level: Easy Topic: Business and Accounting
1-18 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 01 - Accounting: The Language of Business
12. As the first step in the development of generally accepted accounting principles, the FASB writes an exposure draft, which explains the topic under consideration. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Level: Medium Topic: Business and Accounting
13. Public accountants work on the staff of federal, state, or local governmental units. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Learning Objective: 01-06 Define the accounting terms new to this chapter. Level: Easy Topic: What is Accounting?
14. The SEC uses financial information to determine a company's tax base. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 01-03 Identify the users of financial information. Level: Medium Topic: What is Accounting?
15. The death or withdrawal of one partner ends the partnership. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Easy Topic: Business and Accounting
1-19 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 01 - Accounting: The Language of Business
16. Accounting is defined as the process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-01 Define accounting. Level: Medium Topic: What is Accounting?
17. The owners and managers of a business are the only users of the Financial Information. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-03 Identify the users of financial information. Level: Easy Topic: What is Accounting?
18. Most owners and managers rely heavily on the accountant's judgment and knowledge when making financial decisions. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-01 Define accounting. Level: Easy Topic: What is Accounting?
19. Accountants provide financial information to various parties so they can make business decisions. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-01 Define accounting. Level: Easy Topic: What is Accounting?
1-20 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 01 - Accounting: The Language of Business
20. When a business is organized as a sole proprietorship, the owner may combine his/her personal financial information with the business financial information. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Easy Topic: Business and Accounting
21. A business partnership can have only two partners. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Easy Topic: Business and Accounting
Fill in the Blank Questions
22. Accounting is often referred to as the language of ____________________. business
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-01 Define accounting. Level: Easy Topic: What is Accounting?
1-21 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 01 - Accounting: The Language of Business
23. The results of the accounting process are summarized in periodic reports called financial ____________________. statements
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-01 Define accounting. Level: Easy Topic: What is Accounting?
24. Nonprofit organizations, such as cities, public schools, and public hospitals, are referred to as ____________________ entities. social
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Easy Topic: Business and Accounting
25. The three major legal forms of business entity are the sole proprietorship, the partnership, and the ____________________. corporation
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Easy Topic: Business and Accounting
26. A partnership has ____________________ or more owners. two
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Easy Topic: Business and Accounting
1-22 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 01 - Accounting: The Language of Business
27. Ownership in a corporation is evidenced by shares of ____________________. stock
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Easy Topic: Business and Accounting
28. The Securities and Exchange Commission (SEC) regulates the accounting methods and financial reporting of ____________________ owned corporations. publicly
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 01-03 Identify the users of financial information. Level: Easy Topic: What is Accounting?
29. The financial statements submitted to the SEC by a corporation must be ____________________ by an independent accountant to ensure their fairness and adherence to generally accepted accounting principles. audited
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Level: Medium Topic: Business and Accounting
30. Accountants normally choose to practice in one of three areas: public accounting, managerial accounting, or ____________________ accounting. governmental
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Level: Easy Topic: What is Accounting?
1-23 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 01 - Accounting: The Language of Business
31. A form of business entity owned by one person is called a(n) ____________________. sole proprietorship
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Learning Objective: 01-06 Define the accounting terms new to this chapter. Level: Easy Topic: Business and Accounting
32. The people, companies, or government agencies to whom a firm owes money are called ____________________. creditors
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Easy Topic: Business and Accounting
33. The process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties is called ____________________. accounting
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-01 Define accounting. Learning Objective: 01-06 Define the accounting terms new to this chapter. Level: Easy Topic: What is Accounting?
1-24 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 01 - Accounting: The Language of Business
34. Tax accounting is a service offered by public accounting firms that involves tax ____________________ and tax planning. compliance
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Learning Objective: 01-06 Define the accounting terms new to this chapter. Level: Medium Topic: What is Accounting?
35. Generally accepted accounting ____________________ are financial accounting standards that are changed and refined in response to changes in the environment in which businesses operate. principles
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Level: Easy Topic: Business and Accounting
36. The owners of a corporation are called ____________________. stockholders; shareholders
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Easy Topic: Business and Accounting
Multiple Choice Questions
1-25 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 01 - Accounting: The Language of Business
37. Which of the following is NOT an area in which accountants usually practice? A. Public Accounting B. Industrial Accounting C. Governmental Accounting D. Managerial (Private) Accounting
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Level: Easy Topic: What is Accounting?
38. An example of an economic entity is A. a town. B. a business. C. a nonprofit hospital. D. a church.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Medium Topic: Business and Accounting
39. The form of a business organization that is not affected by the withdrawal or death of an owner and can continue forever is A. the sole proprietorship. B. the partnership. C. the corporation. D. the nonprofit organization.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Easy Topic: Business and Accounting
1-26 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 01 - Accounting: The Language of Business
40. Which of the following is NOT a type of information communicated by the financial statements? A. Whether or not the business is profitable B. What types of assets business owns C. How long the business has been in operation D. How much the business owes others
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 01-01 Define accounting. Level: Easy Topic: What is Accounting?
41. Which of the following is NOT a type of information communicated by the financial statements? A. The equity, or value, of the business B. The amount spent on costs (expenses) of the business C. The types of products and services the business provides D. The amount of revenue earned by the business
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 01-01 Define accounting. Level: Easy Topic: What is Accounting?
42. The Financial Accounting Standards Board is responsible for A. auditing financial statements. B. developing generally accepted accounting principles. C. establishing accounting systems for businesses. D. making recommendations to the Securities and Exchange Commission.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Level: Easy Topic: Business and Accounting
1-27 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 01 - Accounting: The Language of Business
43. The government agency that has final authority over the financial reporting of publicly owned corporations is A. the Securities and Exchange Commission. B. the Federal Trade Commission. C. the Internal Revenue Service. D. the Financial Accounting Standards Board.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Level: Easy Topic: Business and Accounting
44. The financial affairs of a business and the financial affairs of the owners should be A. combined in the firm's accounting records. B. reported in different parts of the firm's accounting records. C. combined only if the owner wants them to be. D. kept totally separate.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Easy Topic: Business and Accounting
45. All financial statements submitted to the SEC by publicly owned corporations must include an auditor's report prepared by A. an internal auditor. B. the firm's managerial accountant. C. an independent certified public accountant. D. anyone in the accounting department.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Level: Easy Topic: Business and Accounting
1-28 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 01 - Accounting: The Language of Business
46. The area of accounting that involves the preparation of internal reports for a firm's executives and the analysis of the data in these reports to aid in decision making is known as A. financial accounting. B. managerial accounting. C. auditing. D. cost accounting.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Level: Easy Topic: What is Accounting?
47. The corporations whose stock can be bought and sold on stock exchanges and in over-thecounter markets are referred to as A. privately owned corporations. B. closely held corporations. C. publicly owned corporations. D. sole proprietorships.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Easy Topic: Business and Accounting
48. The group of accounting educators who offer their opinions about proposed FASB statements, after research has been done to determine the possible effects on financial reporting and the economy, is A. the FCC. B. the AICPA. C. the SEC. D. the AAA.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Level: Medium Topic: Business and Accounting
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Chapter 01 - Accounting: The Language of Business
49. Owners are not personally responsible for the debts of the business if the form of business organization is A. the sole proprietorship. B. the partnership. C. the corporation. D. the nonprofit organization.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Easy Topic: Business and Accounting
50. A firm issues periodic reports called A. financial statements. B. summaries. C. tax returns. D. audits.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-01 Define accounting. Level: Easy Topic: What is Accounting?
51. Which of the following is NOT part of the process of accounting for financial information? A. Recording B. Identifying C. Communicating D. Classifying
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-01 Define accounting. Learning Objective: 01-06 Define the accounting terms new to this chapter. Level: Medium Topic: What is Accounting?
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Chapter 01 - Accounting: The Language of Business
52. Which of the following is NOT a service of public accounting firms? A. Auditing B. Tax accounting C. Management advisory services D. Investment services
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Level: Easy Topic: What is Accounting?
53. Tax accounting involves tax compliance and A. tax evaluation. B. tax planning. C. tax configuration. D. tax obfuscation.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Level: Easy Topic: What is Accounting?
54. Tax planning includes A. preparing tax returns. B. auditing tax returns. C. correcting tax returns. D. suggesting actions to reduce tax liability.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Level: Medium Topic: What is Accounting?
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Chapter 01 - Accounting: The Language of Business
55. Managerial accounting is A. public accounting. B. government accounting. C. private accounting. D. tax accounting.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Level: Easy Topic: What is Accounting?
56. The following are all government agencies except A. SEC. B. AICPA. C. IRS. D. FBI.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Level: Easy Topic: What is Accounting?
57. An act passed in response to the wave of corporate accounting scandals is the A. Saxon-Ordanly Act. B. Sarbanes-Oxley Act. C. Sardonic-Oxone Act. D. Sorbine-Oxide Act.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 01-03 Identify the users of financial information. Level: Medium Topic: What is Accounting?
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Chapter 01 - Accounting: The Language of Business
58. Owners and managers need financial information in order to A. grant loans. B. issue credit. C. collect taxes. D. make decisions.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-03 Identify the users of financial information. Level: Easy Topic: What is Accounting?
59. The Sarbanes-Oxley Act includes rules on A. auditor retention. B. auditor reliability. C. auditor rotation. D. auditor reporting.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 01-03 Identify the users of financial information. Level: Medium Topic: What is Accounting?
60. A form of the partnerships business entity is A. LLP. B. LLC. C. INC. D. DBA.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Medium Topic: Business and Accounting
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Chapter 01 - Accounting: The Language of Business
61. The FASB develops Statements of Financial Accounting Standards in the following order A. issues an exposure draft, obtains responses to the exposure draft, issues a statement of principle, issues a discussion memorandum, obtains responses to the discussion memorandum B. issues a discussion memorandum, obtains responses to the discussion memorandum, issues an exposure draft, obtains responses to the exposure draft, issues a statement of principle C. issues a discussion memorandum, obtains responses to the discussion memorandum, issues a statement of principle, issues an exposure draft, obtains responses to the exposure draft D. issues a statement of principle, issues a discussion memorandum, obtains responses to the discussion memorandum, issues an exposure draft, obtains responses to the exposure draft
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Level: Medium Topic: Business and Accounting
62. The review of financial statements to assess their fairness and adherence to GAAP is A. accounting. B. preparation. C. compliance. D. auditing.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Learning Objective: 01-06 Define the accounting terms new to this chapter. Level: Easy Topic: What is Accounting?
63. Management advisory services are designed to help A. government agencies. B. clients. C. employers. D. creditors.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Learning Objective: 01-06 Define the accounting terms new to this chapter. Level: Easy Topic: What is Accounting?
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Chapter 01 - Accounting: The Language of Business
64. An independent accountant who provides accounting services to the public for a fee is a A. CIA. B. CFE. C. CMA. D. CPA.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Learning Objective: 01-06 Define the accounting terms new to this chapter. Level: Easy Topic: What is Accounting?
Short Answer Questions
65. What is the "language of business?" List three groups who use this financial information. Accounting is the language of business. The groups who use this information are owners and managers, suppliers, banks, tax authorities, regulatory agencies and investors, customers, and employees and unions.
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 01-01 Define accounting. Learning Objective: 01-03 Identify the users of financial information. Level: Easy Topic: What is Accounting?
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Chapter 01 - Accounting: The Language of Business
66. Cullen Company of country X and Shaw Industries of country Y have issued financial statements in compliance with the accounting principles of their respective countries. They would like to work together on a project and need to compare their current financial statements prior to beginning. However, the accounting principles of the two countries differ. What organization might they turn to regarding this issue? (Give both the full name of the organization and its acronym.) What is the function of this organization? Organization: International Accounting Standards Board (IASB). The function of the IASB is to deal with issues caused by the lack of uniform accounting principles and make recommendations to enhance comparability.
AACSB: Analytic AICPA BB: Global Bloom's: Understand Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Level: Medium Topic: Business and Accounting
67. You have just entered college and decide to pursue a career as an accountant. What are the three areas in which an accountant can practice? Public accounting, managerial (private) accounting, and governmental accounting
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Level: Easy Topic: What is Accounting?
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Chapter 01 - Accounting: The Language of Business
68. There are three general services public accountants offer. List and briefly describe each. Auditing: the review of financial statements to assess their fairness and adherence to GAAP. Tax accounting: tax compliance-dealing with the preparation of tax returns and the audit of those returns, and tax planning-giving advice to clients on how to structure their financial affairs in order to reduce their tax liability. Management advisory services: helping clients improve their information systems or their business performance.
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Level: Easy Topic: What is Accounting?
69. List at least five activities performed by managerial accountants. Establishing accounting policies, managing the accounting system, preparing financial statements, interpreting financial information, providing financial advice to management, preparing tax forms, performing tax planning services, and preparing internal reports for management.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Level: Easy Topic: What is Accounting?
70. Discuss the differences among: entity, economic entity, and social entity. Entity-recognized as having its own separate identity. Social entity-nonprofit organizations. Economic entity-business or organization whose major purpose is to produce a profit.
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Medium Topic: Business and Accounting
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Chapter 01 - Accounting: The Language of Business
71. How do sole proprietorships, partnerships, and corporations differ? Sole proprietorships-business entities owned by one person who is responsible for the business debts and taxes. The business ends when the owner dies. Partnerships-business entities owned by two or more individuals who are individually, and as a group, responsible for the partnership's debts and taxes. A partnership ends when one or more partners withdraw or die. Corporations-business entities with one or more owners which can continue indefinitely unless bankruptcy occurs or the stockholders vote to liquidate. Stockholders (owners) are not personally responsible for the corporation's debts and can only lose the amount they invested.
AACSB: Analytic AICPA BB: Industry Bloom's: Evaluate Learning Objective: 01-04 Compare and contrast the three types of business entities. Level: Easy Topic: Business and Accounting
72. List three individuals or groups who use financial information to make decisions about a firm. For each listed, give an example of why they would need the information. Owners and managers-to evaluate results of operations or to make decisions about the future. Suppliers-to assess the ability of the firm to pay its bills and to set credit limits. Banks-to determine whether the firm can repay the loan in a timely manner. Tax authorities-to determine the tax base of the firm. Regulatory agencies and investors-to fulfill the requirements of the law. Customers-to determine whether service on purchases will continue into the future. Employees and unions-to negotiate wages and benefits.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-03 Identify the users of financial information. Level: Easy Topic: What is Accounting?
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Chapter 01 - Accounting: The Language of Business
73. List the "Big Four" public accounting firms in the United States. Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Level: Medium Topic: What is Accounting?
74. Audited financial statements include an auditor's report. What does this auditor's report contain? It contains the auditor's opinion regarding the fairness of the firm's financial statements and confirms the adherence to GAAP in those financial reports.
AACSB: Analytic AICPA BB: Industry Bloom's: Analyze Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Level: Hard Topic: Business and Accounting
75. List at least three of the provisions of the Sarbanes-Oxley Act. The act: tightens regulation of financial reporting by publicly held companies and their accountants and auditors; creates a five-member Public Company Accounting Oversight Board to oversee the accounting profession which in turn is overseen by the SEC; includes rules on consulting services, auditor rotation, criminal penalties, corporate governance, and securities regulation; requires auditors to maintain all audit or review work papers for five years; requires chief executives and chief financial officers of publicly traded corporations to certify their financial statements; requires quicker disclosure of material changes in a firm's financial position; provides protection for whistle blowers; and lengthens the time investors have to file lawsuits for securities fraud.
AACSB: Analytic AICPA BB: Legal Bloom's: Analyze Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Level: Medium Topic: What is Accounting?
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Chapter 01 - Accounting: The Language of Business
76. Explain the process the Financial Accounting Standards Board (FASB) employs to develop and issue Statements of Financial Accounting Standards. The FASB writes a discussion memorandum explaining the topic under consideration. Then it holds public hearings so interested parties can express their opinions orally or in writing. After these hearings, the FASB releases an exposure draft describing the proposed statement. FASB then receives and evaluates public comment about the draft, and finally FASB members vote on the statement, which, if approved by four of the seven members, is then issued.
AACSB: Analytic AICPA BB: Legal Bloom's: Analyze Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Level: Hard Topic: Business and Accounting
77. What determines the independence of Certified Public Accountants (CPAs)? They are not employees of the companies they audit and they do not have a financial interest in those companies.
AACSB: Analytic AICPA BB: Industry Bloom's: Analyze Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Level: Hard Topic: Business and Accounting
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Chapter 02 - Analyzing Business Transactions
Chapter 02 Analyzing Business Transactions True / False Questions
1. The entire process of analyzing, recording, and reporting business transactions is based on the fundamental accounting equation. True False
2. When using the fundamental accounting equation, an accountant must make sure that total assets are always equal to total liabilities and owner's equity. True False
3. Assets always equal debts of the business plus the financial interest of the owner. True False
4. When cash is paid to a creditor, the firm's liabilities decrease. True False
5. Al Dunn Bakery bought a new oven for $1,380. Al paid $300 as a cash down payment and will pay the balance in 30 days. Total assets increased by $1,080. True False
6. If the owner takes cash out of the business for personal use, the withdrawal should be recorded as an expense of the business. True False
7. For statements prepared on plain paper, dollar signs are placed with the first amount in each column and with each total. True False
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Chapter 02 - Analyzing Business Transactions
8. When cash is collected from accounts receivable, the total amount of assets increases. True False
9. A company has assets of $56,320 and liabilities of $29,500. The owner's equity is $85,820. True False
10. The expenses for a period are reported on the balance sheet. True False
11. A double line drawn under the figures in a money column shows that the computation is complete. True False
12. A business transaction is a financial event that affects the resources of a business. True False
13. A creditor's claim against the firm's property lasts until the debt is paid. True False
14. If there is an excess of expenses over revenues, the excess represents a profit. True False
15. Revenue is recorded when cash is collected from charge-account clients. True False
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Chapter 02 - Analyzing Business Transactions
16. A withdrawal of funds by the owner for personal use is considered a business expense. True False
17. The statement of owner's equity is prepared before the balance sheet so that the ending capital balance is available. True False
18. If assets are $8,000 and liabilities are $2,000, owner's equity is $10,000. True False
19. The amount of net income or net loss is needed to complete the statement of owner's equity. True False
20. Withdrawals by the owner are reported on the income statement. True False
21. The income statement is also known as the profit and loss statement. True False
22. The net income or net loss for the period is shown on both the income statement and the balance sheet. True False
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Chapter 02 - Analyzing Business Transactions
Fill in the Blank Questions
23. The property that a business owns is referred to as its ___________________. ________________________________________
24. The debts or obligations of a business are known as its ___________________. ________________________________________
25. The income statement shows revenue, ___________________, and net income or net loss for a period of time. ________________________________________
26. The financial interest of the owner in a business is called owner's equity, or ___________________. ________________________________________
27. The account used to record amounts that are owed for goods or services purchased on credit are known as ___________________. ________________________________________
28. When a business sells services for cash, assets increase and revenue ___________________. ________________________________________
29. The account used to record amounts that will be collected from charge account customers in the future are referred to as ___________________. ________________________________________
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Chapter 02 - Analyzing Business Transactions
30. The ____________________ is the financial report that shows the assets, liabilities, and owner's equity of a business on a specific date. ________________________________________
31. If assets are $17,000 and owner's equity is $10,000, liabilities are ___________________. ________________________________________
32. When a business pays cash for salaries, assets decrease and expenses ___________________. ________________________________________
33. Funds taken from the business by the owner for personal use are called ___________________. ________________________________________
34. The statement of ____________________ reports the changes that have occurred in the owner's financial interest during the reporting period. ________________________________________
35. When revenue is greater than expenses, the result is a net ___________________. ________________________________________
36. When revenue and expenses are equal, the firm is said to ___________________. ________________________________________
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Chapter 02 - Analyzing Business Transactions
37. The three-line heading of a financial statement shows who, what, and ___________________. ________________________________________
Multiple Choice Questions
38. The balance sheet shows A. the results of business operations. B. all revenues and expenses. C. the amount of net income or loss. D. the financial position of a business at a given time.
39. Amounts that a business must pay in the future are known as A. accounts receivable. B. accounts payable. C. capital. D. expenses.
40. Examples of assets are A. cash and accounts receivable. B. cash and revenue. C. cash and rent expense. D. investments by the owner and revenue.
41. Ginger Yale Ice Company receives money from a customer on account. Recording this transaction will A. increase Accounts Receivable B. increase G. Yale, Capital C. decrease Accounts Payable D. increase Cash
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Chapter 02 - Analyzing Business Transactions
42. The owner's investment or equity in a business is called A. cash B. drawing C. capital D. accounts payable
At the end of the first month of operations for SloMo Delivery Service, the business had the following accounts: Accounts Receivable, $1,200; Prepaid Insurance, $500; Equipment, $36,200 and Cash, $40,650. On the same date, SloMo owed the following creditors: Simpson Supply Company, $12,000; Allen Office Equipment, $9,500.
43. The total assets for the SloMo Delivery Service are A. $42,350 B. $78,550 C. $76,850 D. $41,850
44. The total amount of Liabilities is A. $36,200 B. $9,500 C. $21,500 D. $40,650
45. Total assets of Douglas Fuhr Furniture Co. are $36,000 and the total liabilities are $12,000. What is the amount of the owner's equity? A. $36,000 B. $24,000 C. $48,000 D. $6,000
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Chapter 02 - Analyzing Business Transactions
46. If during the year total assets increase by $75,000 and total liabilities decrease by $16,000, by how much did owner's equity increase/decrease? A. $91,000 increase B. $59,000 decrease C. $91,000 decrease D. $75,000 increase
47. Which financial statement is reported as of a specific date? A. Balance Sheet B. Statement of Owner's Equity C. Income Statement D. Statement of Changes in Financial Position
48. A net loss results A. when expenses are greater than revenue. B. when assets are greater than liabilities. C. when revenue is greater than expenses. D. when expenses are greater than assets.
49. The income statement shows A. the financial position of a business on a specific date. B. revenue and owner's equity. C. the results of operations for a period of time. D. the total value of the business.
50. If the income statement covered a six-month period ending on November 30, 2010, the third line of the income statement heading would read A. Month Ended November 30, 2010. B. November 30, 2010. C. Six-month Period Ended November 30, 2010. D. Month of November, 2010.
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Chapter 02 - Analyzing Business Transactions
51. When the owner invests cash in a business, A. assets and revenue increase. B. assets increase and owner's equity decreases. C. liabilities decrease and owner's equity increases. D. assets and owner's equity increase.
52. When equipment is purchased on credit, A. assets and liabilities increase. B. assets increase and liabilities decrease. C. assets and owner's equity increase. D. assets and expenses increase.
53. When equipment is purchased for cash, A. assets decrease and expenses increase. B. one asset increases and another asset decreases. C. assets and owner's equity increase. D. assets increase and liabilities decrease.
54. When the owner withdraws cash for personal use, A. assets decrease and expenses increase. B. assets decrease and owner's equity increases. C. assets decrease and owner's equity decreases. D. owner's equity decreases and revenue decreases.
55. When the owner writes a company check to pay the firm's electric bill, A. assets and owner's equity increase. B. assets decrease and expenses increase. C. assets and liabilities decrease. D. expenses increase and owner's equity increases.
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Chapter 02 - Analyzing Business Transactions
56. If liabilities are $4,000 and owner's equity is $15,000, assets are A. $9,000. B. $15,000. C. $19,000. D. $4,000.
57. Assets and liabilities are reported on A. the balance sheet. B. the income statement. C. the statement of owner's equity. D. both the balance sheet and the income statement.
58. The financial statement that is prepared first is A. up to the accountant. B. the income statement. C. the balance sheet. D. the statement of owner's equity.
59. The rent paid for future months is a(n) A. asset. B. liability. C. expense. D. revenue.
60. The statement of financial position is another term for which financial statement? A. Income Statement B. Statement of Owner's Equity C. Balance Sheet D. Trial Balance
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Chapter 02 - Analyzing Business Transactions
61. Which financial statement is a representation of the accounting equation? A. Income Statement B. Statement of Owner's Equity C. Balance Sheet D. Profit and Loss Statement
62. The Statement of Owner's Equity is calculated as follows: A. beginning capital + net income - withdrawals + additional investments = ending capital B. beginning capital + net loss + withdrawals + additional investments = ending capital C. beginning capital + net loss - withdrawals + additional investments = ending capital D. beginning capital + net income + withdrawals + additional investments = ending capital
63. An Income Statement is all of the following except A. a formal report of business operations. B. a profit and loss statement. C. a statement of revenues less withdrawals and expenses. D. a statement of income and expenses.
64. The current worth of an asset is its A. original cost. B. cost less accumulated depreciation. C. asking price when put up for sale. D. fair market value.
65. Owner's equity is A. the amount taken out of a business by the owner for personal use. B. the financial interest of the owner of a business. C. the amount the owner invested in the business. D. the revenues less the expenses.
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Chapter 02 - Analyzing Business Transactions
66. In order to analyze the effect of a business transaction one must do all of the following except A. identify the property. B. identify who owns the property. C. determine which asset, liability, or equity accounts will change. D. determine the amount of increase or decrease.
67. The balance sheet shows each of the following except the A. owner's investment. B. amount and types of property the business owns. C. owner's interest. D. amount owed creditors.
68. The Balance Sheet heading includes each of the following except A. firm's name. B. firm's address. C. title of the report. D. date of the report.
69. An expense by definition is not A. an amount a business must pay in the future. B. an outflow of cash. C. the use of other assets. D. the incurring of a liability.
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Chapter 02 - Analyzing Business Transactions
Short Answer Questions
70. On December 1, 2013, Geneva Jordan opened her new business with the following assets and liabilities. Complete the accounting equation for the firm.
Assets $________ = Liabilities $________ + Owner's Equity $________
71. During October, a firm had the following transactions involving revenue and expenses. Did the firm earn a net income or incur a net loss for the period? What was the amount? Paid $1,200 for rent Provided services for $2,750 in cash Paid $250 for telephone service Provided services for $1,900 on credit Paid salaries of $1,675 to employees Paid $350 for office cleaning service
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Chapter 02 - Analyzing Business Transactions
The transactions listed below took place at the Mitchell Advertising Agency. These transactions affected the following accounts. Indicate the accounts affected and use plus and minus to show the changes caused by each transaction.
72. Performed services on credit
73. Paid cash for utilities
74. Sent a check to a creditor
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Chapter 02 - Analyzing Business Transactions
75. Issued checks to pay salaries
76. Purchased a computer for cash
77. Received cash from credit customers
78. Performed services for cash
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Chapter 02 - Analyzing Business Transactions
79. The owner made an additional investment of cash
80. Purchased furniture on credit
81. Had a computer repaired; payment is due in 30 days
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Chapter 02 - Analyzing Business Transactions
82. Guy McKinley started the McKinley Charter Service at the beginning of August 2013. On August 31, 2013, the accounting records of the business showed the following information. Prepare an income statement and a statement of owner's equity for the month and a balance sheet as of August 31, 2013.
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Chapter 02 - Analyzing Business Transactions
On September 1, Shawn Dahl established Whitewater Rentals, a canoe and kayak rental business. The following transactions occurred in the month of September and affected the following accounts:
Transactions 1. Shawn Dahl invested $45,000 in cash to open the business 2. Paid $12,700 in cash for the purchase of kayak and canoe equipment 3. Paid $1,050 in cash for rent expense 4. Purchased additional kayak and canoe equipment for $3,800 on credit 5. Received $3,900 in cash for kayak rentals 6. Rented canoes and kayaks for $1,200 on account 7. Purchased office equipment for $125 in cash 8. Received $800 in cash from credit clients 9. Shawn Dahl withdrew $1,500 in cash for personal expenses
83. Based on the information shown in transaction #4 above, indicate the accounts affected and use plus and minus to show the changes caused by the transaction.
84. Based on the information shown above, what is the balance of Accounts Receivable for Whitewater Rentals at the end of September?
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Chapter 02 - Analyzing Business Transactions
85. Based on the information above, what is the fundamental accounting equation at the end of September for Whitewater Rentals?
The figure below shows the transactions for Sawyer Architecture Services during June. Greg Sawyer opened this business on June 1 with a capital investment of $72,000 (Transaction 1).
86. What was the net income or net loss for Sawyer Architecture Services for the month of June?
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Chapter 02 - Analyzing Business Transactions
87. Prepare the statement of owner's equity for Sawyer Architecture Services for the month ended June 30, 2013.
88. Prepare the balance sheet for Sawyer Architecture Services as of June 30, 2013.
Cullen Beatty plans to start a consulting business—Cullen Consulting Services. In preparation to do this, on April 1, 2013, he invested $50,000 in cash and $19,000 in equipment, and opened an account at Office Plus by purchasing $1,500 in office supplies which is due by the end of the month. He then signed a one-year lease agreement on an office building for $6,000, paying the full amount in advance.
89. Prepare a Balance Sheet for Cullen Consulting Services as of April 1, 2013, before he conducts any services.
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Chapter 02 - Analyzing Business Transactions
90. Cullen would like an explanation of the accounting for his business actions as of April 1, 2013. Explain the terms and interactions between the categories on a Balance Sheet.
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Chapter 02 - Analyzing Business Transactions
Chapter 02 Analyzing Business Transactions Answer Key
True / False Questions
1. The entire process of analyzing, recording, and reporting business transactions is based on the fundamental accounting equation. TRUE
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
2. When using the fundamental accounting equation, an accountant must make sure that total assets are always equal to total liabilities and owner's equity. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
2-22 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
3. Assets always equal debts of the business plus the financial interest of the owner. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Level: Easy Topic: Property and Financial Interest
4. When cash is paid to a creditor, the firm's liabilities decrease. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Level: Easy Topic: Property and Financial Interest
5. Al Dunn Bakery bought a new oven for $1,380. Al paid $300 as a cash down payment and will pay the balance in 30 days. Total assets increased by $1,080. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Medium Topic: The Accounting Equation and Financial Statements
6. If the owner takes cash out of the business for personal use, the withdrawal should be recorded as an expense of the business. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
2-23 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
7. For statements prepared on plain paper, dollar signs are placed with the first amount in each column and with each total. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Level: Medium Topic: The Accounting Equation and Financial Statements
8. When cash is collected from accounts receivable, the total amount of assets increases. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
9. A company has assets of $56,320 and liabilities of $29,500. The owner's equity is $85,820. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
10. The expenses for a period are reported on the balance sheet. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-04 Prepare an income statement. Level: Easy Topic: The Accounting Equation and Financial Statements
2-24 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
11. A double line drawn under the figures in a money column shows that the computation is complete. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-04 Prepare an income statement. Level: Easy Topic: The Accounting Equation and Financial Statements
12. A business transaction is a financial event that affects the resources of a business. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Level: Easy Topic: Property and Financial Interest
13. A creditor's claim against the firm's property lasts until the debt is paid. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Level: Medium Topic: Property and Financial Interest
14. If there is an excess of expenses over revenues, the excess represents a profit. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-04 Prepare an income statement. Level: Easy Topic: The Accounting Equation and Financial Statements
2-25 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
15. Revenue is recorded when cash is collected from charge-account clients. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Medium Topic: The Accounting Equation and Financial Statements
16. A withdrawal of funds by the owner for personal use is considered a business expense. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
17. The statement of owner's equity is prepared before the balance sheet so that the ending capital balance is available. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Level: Easy Topic: The Accounting Equation and Financial Statements
18. If assets are $8,000 and liabilities are $2,000, owner's equity is $10,000. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
2-26 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
19. The amount of net income or net loss is needed to complete the statement of owner's equity. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Level: Medium Topic: The Accounting Equation and Financial Statements
20. Withdrawals by the owner are reported on the income statement. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Level: Easy Topic: The Accounting Equation and Financial Statements
21. The income statement is also known as the profit and loss statement. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-04 Prepare an income statement. Level: Easy Topic: The Accounting Equation and Financial Statements
22. The net income or net loss for the period is shown on both the income statement and the balance sheet. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-04 Prepare an income statement. Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Level: Medium Topic: The Accounting Equation and Financial Statements
2-27 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
Fill in the Blank Questions
23. The property that a business owns is referred to as its ___________________. assets
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Level: Easy Topic: Property and Financial Interest
24. The debts or obligations of a business are known as its ___________________. liabilities
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Level: Easy Topic: Property and Financial Interest
25. The income statement shows revenue, ___________________, and net income or net loss for a period of time. expenses
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-04 Prepare an income statement. Level: Easy Topic: The Accounting Equation and Financial Statements
2-28 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
26. The financial interest of the owner in a business is called owner's equity, or ___________________. capital
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Level: Easy Topic: Property and Financial Interest
27. The account used to record amounts that are owed for goods or services purchased on credit are known as ___________________. accounts payable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Level: Easy Topic: Property and Financial Interest
28. When a business sells services for cash, assets increase and revenue ___________________. increases
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
2-29 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
29. The account used to record amounts that will be collected from charge account customers in the future are referred to as ___________________. accounts receivable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
30. The ____________________ is the financial report that shows the assets, liabilities, and owner's equity of a business on a specific date. balance sheet
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Level: Easy Topic: Property and Financial Interest
31. If assets are $17,000 and owner's equity is $10,000, liabilities are ___________________. $7,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
2-30 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
32. When a business pays cash for salaries, assets decrease and expenses ___________________. increase
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
33. Funds taken from the business by the owner for personal use are called ___________________. withdrawals
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
34. The statement of ____________________ reports the changes that have occurred in the owner's financial interest during the reporting period. owner's equity
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Level: Easy Topic: The Accounting Equation and Financial Statements
2-31 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
35. When revenue is greater than expenses, the result is a net ___________________. income
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 02-04 Prepare an income statement. Level: Easy Topic: The Accounting Equation and Financial Statements
36. When revenue and expenses are equal, the firm is said to ___________________. break even
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-04 Prepare an income statement. Level: Easy Topic: The Accounting Equation and Financial Statements
37. The three-line heading of a financial statement shows who, what, and ___________________. when
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-04 Prepare an income statement. Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Level: Easy Topic: The Accounting Equation and Financial Statements
2-32 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
Multiple Choice Questions
38. The balance sheet shows A. the results of business operations. B. all revenues and expenses. C. the amount of net income or loss. D. the financial position of a business at a given time.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Level: Easy Topic: Property and Financial Interest
39. Amounts that a business must pay in the future are known as A. accounts receivable. B. accounts payable. C. capital. D. expenses.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Level: Easy Topic: Property and Financial Interest
40. Examples of assets are A. cash and accounts receivable. B. cash and revenue. C. cash and rent expense. D. investments by the owner and revenue.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: Property and Financial Interest Topic: The Accounting Equation and Financial Statements
2-33 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
41. Ginger Yale Ice Company receives money from a customer on account. Recording this transaction will A. increase Accounts Receivable B. increase G. Yale, Capital C. decrease Accounts Payable D. increase Cash
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Level: Easy Topic: Property and Financial Interest
42. The owner's investment or equity in a business is called A. cash B. drawing C. capital D. accounts payable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Level: Easy Topic: Property and Financial Interest
At the end of the first month of operations for SloMo Delivery Service, the business had the following accounts: Accounts Receivable, $1,200; Prepaid Insurance, $500; Equipment, $36,200 and Cash, $40,650. On the same date, SloMo owed the following creditors: Simpson Supply Company, $12,000; Allen Office Equipment, $9,500.
2-34 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
43. The total assets for the SloMo Delivery Service are A. $42,350 B. $78,550 C. $76,850 D. $41,850
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Level: Medium Topic: The Accounting Equation and Financial Statements
44. The total amount of Liabilities is A. $36,200 B. $9,500 C. $21,500 D. $40,650
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Level: Medium Topic: The Accounting Equation and Financial Statements
45. Total assets of Douglas Fuhr Furniture Co. are $36,000 and the total liabilities are $12,000. What is the amount of the owner's equity? A. $36,000 B. $24,000 C. $48,000 D. $6,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
2-35 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
46. If during the year total assets increase by $75,000 and total liabilities decrease by $16,000, by how much did owner's equity increase/decrease? A. $91,000 increase B. $59,000 decrease C. $91,000 decrease D. $75,000 increase
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Hard Topic: The Accounting Equation and Financial Statements
47. Which financial statement is reported as of a specific date? A. Balance Sheet B. Statement of Owner's Equity C. Income Statement D. Statement of Changes in Financial Position
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Level: Easy Topic: The Accounting Equation and Financial Statements
48. A net loss results A. when expenses are greater than revenue. B. when assets are greater than liabilities. C. when revenue is greater than expenses. D. when expenses are greater than assets.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-04 Prepare an income statement. Level: Easy Topic: The Accounting Equation and Financial Statements
2-36 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
49. The income statement shows A. the financial position of a business on a specific date. B. revenue and owner's equity. C. the results of operations for a period of time. D. the total value of the business.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-04 Prepare an income statement. Level: Medium Topic: The Accounting Equation and Financial Statements
50. If the income statement covered a six-month period ending on November 30, 2010, the third line of the income statement heading would read A. Month Ended November 30, 2010. B. November 30, 2010. C. Six-month Period Ended November 30, 2010. D. Month of November, 2010.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 02-04 Prepare an income statement. Level: Medium Topic: The Accounting Equation and Financial Statements
51. When the owner invests cash in a business, A. assets and revenue increase. B. assets increase and owner's equity decreases. C. liabilities decrease and owner's equity increases. D. assets and owner's equity increase.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
2-37 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
52. When equipment is purchased on credit, A. assets and liabilities increase. B. assets increase and liabilities decrease. C. assets and owner's equity increase. D. assets and expenses increase.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Level: Easy Topic: Property and Financial Interest
53. When equipment is purchased for cash, A. assets decrease and expenses increase. B. one asset increases and another asset decreases. C. assets and owner's equity increase. D. assets increase and liabilities decrease.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Level: Medium Topic: Property and Financial Interest
54. When the owner withdraws cash for personal use, A. assets decrease and expenses increase. B. assets decrease and owner's equity increases. C. assets decrease and owner's equity decreases. D. owner's equity decreases and revenue decreases.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Medium Topic: The Accounting Equation and Financial Statements
2-38 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
55. When the owner writes a company check to pay the firm's electric bill, A. assets and owner's equity increase. B. assets decrease and expenses increase. C. assets and liabilities decrease. D. expenses increase and owner's equity increases.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
56. If liabilities are $4,000 and owner's equity is $15,000, assets are A. $9,000. B. $15,000. C. $19,000. D. $4,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
57. Assets and liabilities are reported on A. the balance sheet. B. the income statement. C. the statement of owner's equity. D. both the balance sheet and the income statement.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Level: Easy Topic: Property and Financial Interest
2-39 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
58. The financial statement that is prepared first is A. up to the accountant. B. the income statement. C. the balance sheet. D. the statement of owner's equity.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-04 Prepare an income statement. Level: Easy Topic: The Accounting Equation and Financial Statements
59. The rent paid for future months is a(n) A. asset. B. liability. C. expense. D. revenue.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Level: Easy Topic: Property and Financial Interest
60. The statement of financial position is another term for which financial statement? A. Income Statement B. Statement of Owner's Equity C. Balance Sheet D. Trial Balance
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Level: Easy Topic: Property and Financial Interest
2-40 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
61. Which financial statement is a representation of the accounting equation? A. Income Statement B. Statement of Owner's Equity C. Balance Sheet D. Profit and Loss Statement
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Medium Topic: The Accounting Equation and Financial Statements
62. The Statement of Owner's Equity is calculated as follows: A. beginning capital + net income - withdrawals + additional investments = ending capital B. beginning capital + net loss + withdrawals + additional investments = ending capital C. beginning capital + net loss - withdrawals + additional investments = ending capital D. beginning capital + net income + withdrawals + additional investments = ending capital
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Level: Medium Topic: The Accounting Equation and Financial Statements
63. An Income Statement is all of the following except A. a formal report of business operations. B. a profit and loss statement. C. a statement of revenues less withdrawals and expenses. D. a statement of income and expenses.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-04 Prepare an income statement. Level: Medium Topic: The Accounting Equation and Financial Statements
2-41 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
64. The current worth of an asset is its A. original cost. B. cost less accumulated depreciation. C. asking price when put up for sale. D. fair market value.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-06 Define the accounting terms new to this chapter. Level: Medium Topic: The Accounting Equation and Financial Statements
65. Owner's equity is A. the amount taken out of a business by the owner for personal use. B. the financial interest of the owner of a business. C. the amount the owner invested in the business. D. the revenues less the expenses.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 02-06 Define the accounting terms new to this chapter. Level: Medium Topic: The Accounting Equation and Financial Statements
66. In order to analyze the effect of a business transaction one must do all of the following except A. identify the property. B. identify who owns the property. C. determine which asset, liability, or equity accounts will change. D. determine the amount of increase or decrease.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Level: Medium Topic: Property and Financial Interest
2-42 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
67. The balance sheet shows each of the following except the A. owner's investment. B. amount and types of property the business owns. C. owner's interest. D. amount owed creditors.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Level: Easy Topic: Property and Financial Interest
68. The Balance Sheet heading includes each of the following except A. firm's name. B. firm's address. C. title of the report. D. date of the report.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Level: Easy Topic: The Accounting Equation and Financial Statements
69. An expense by definition is not A. an amount a business must pay in the future. B. an outflow of cash. C. the use of other assets. D. the incurring of a liability.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-06 Define the accounting terms new to this chapter. Level: Medium Topic: The Accounting Equation and Financial Statements
2-43 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
Short Answer Questions
70. On December 1, 2013, Geneva Jordan opened her new business with the following assets and liabilities. Complete the accounting equation for the firm.
Assets $________ = Liabilities $________ + Owner's Equity $________ Assets $37,400 = Liabilities $16,600 + Owner's Equity $20,800
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Medium Topic: The Accounting Equation and Financial Statements
71. During October, a firm had the following transactions involving revenue and expenses. Did the firm earn a net income or incur a net loss for the period? What was the amount? Paid $1,200 for rent Provided services for $2,750 in cash Paid $250 for telephone service Provided services for $1,900 on credit Paid salaries of $1,675 to employees Paid $350 for office cleaning service Net income: $1,175
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 02-04 Prepare an income statement. Level: Medium Topic: The Accounting Equation and Financial Statements
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Chapter 02 - Analyzing Business Transactions
The transactions listed below took place at the Mitchell Advertising Agency. These transactions affected the following accounts. Indicate the accounts affected and use plus and minus to show the changes caused by each transaction.
72. Performed services on credit plus Accounts Receivable; plus Revenue
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
73. Paid cash for utilities plus Expenses; minus Cash
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
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Chapter 02 - Analyzing Business Transactions
74. Sent a check to a creditor minus Accounts Payable; minus Cash
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Level: Easy Topic: Property and Financial Interest
75. Issued checks to pay salaries plus Expenses; minus Cash
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
76. Purchased a computer for cash plus Equipment; minus Cash
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Level: Easy Topic: Property and Financial Interest
2-46 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
77. Received cash from credit customers plus Cash; minus Accounts Receivable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
78. Performed services for cash plus Cash; plus Revenue
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
79. The owner made an additional investment of cash plus Cash; plus K. Mitchell, Capital
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Level: Easy Topic: Property and Financial Interest
2-47 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
80. Purchased furniture on credit plus Furniture; plus Accounts Payable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Level: Easy Topic: Property and Financial Interest
81. Had a computer repaired; payment is due in 30 days plus Expenses; plus Accounts Payable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Level: Easy Topic: Property and Financial Interest
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Chapter 02 - Analyzing Business Transactions
82. Guy McKinley started the McKinley Charter Service at the beginning of August 2013. On August 31, 2013, the accounting records of the business showed the following information. Prepare an income statement and a statement of owner's equity for the month and a balance sheet as of August 31, 2013.
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Chapter 02 - Analyzing Business Transactions
2-50 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 02-04 Prepare an income statement. Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Level: Hard Topic: The Accounting Equation and Financial Statements
On September 1, Shawn Dahl established Whitewater Rentals, a canoe and kayak rental business. The following transactions occurred in the month of September and affected the following accounts:
Transactions 1. Shawn Dahl invested $45,000 in cash to open the business 2. Paid $12,700 in cash for the purchase of kayak and canoe equipment 3. Paid $1,050 in cash for rent expense 4. Purchased additional kayak and canoe equipment for $3,800 on credit 5. Received $3,900 in cash for kayak rentals 6. Rented canoes and kayaks for $1,200 on account 7. Purchased office equipment for $125 in cash 8. Received $800 in cash from credit clients 9. Shawn Dahl withdrew $1,500 in cash for personal expenses
83. Based on the information shown in transaction #4 above, indicate the accounts affected and use plus and minus to show the changes caused by the transaction. plus Canoe and Kayak Equipment; plus Accounts Payable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Level: Easy Topic: Property and Financial Interest
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Chapter 02 - Analyzing Business Transactions
84. Based on the information shown above, what is the balance of Accounts Receivable for Whitewater Rentals at the end of September? The balance of Accounts Receivable at September 30 is $400.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Easy Topic: The Accounting Equation and Financial Statements
85. Based on the information above, what is the fundamental accounting equation at the end of September for Whitewater Rentals? Assets $51,350 = Liabilities $3, 800 + Owner's Equity $47,550
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Level: Hard Topic: The Accounting Equation and Financial Statements
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Chapter 02 - Analyzing Business Transactions
The figure below shows the transactions for Sawyer Architecture Services during June. Greg Sawyer opened this business on June 1 with a capital investment of $72,000 (Transaction 1).
86. What was the net income or net loss for Sawyer Architecture Services for the month of June? Net income was $1,700.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 02-04 Prepare an income statement. Level: Easy Topic: The Accounting Equation and Financial Statements
2-53 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
87. Prepare the statement of owner's equity for Sawyer Architecture Services for the month ended June 30, 2013.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Level: Medium Topic: The Accounting Equation and Financial Statements
2-54 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 - Analyzing Business Transactions
88. Prepare the balance sheet for Sawyer Architecture Services as of June 30, 2013.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Level: Medium Topic: The Accounting Equation and Financial Statements
Cullen Beatty plans to start a consulting business—Cullen Consulting Services. In preparation to do this, on April 1, 2013, he invested $50,000 in cash and $19,000 in equipment, and opened an account at Office Plus by purchasing $1,500 in office supplies which is due by the end of the month. He then signed a one-year lease agreement on an office building for $6,000, paying the full amount in advance.
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Chapter 02 - Analyzing Business Transactions
89. Prepare a Balance Sheet for Cullen Consulting Services as of April 1, 2013, before he conducts any services.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Level: Medium Topic: Property and Financial Interest
90. Cullen would like an explanation of the accounting for his business actions as of April 1, 2013. Explain the terms and interactions between the categories on a Balance Sheet. Answers will vary. Items that should be included are: The Balance Sheet is a format report of a business's financial condition --on a certain date --reports assets, liabilities, and owner's equity of a business --reports property owned by a business, obligations (debts) of a business --reports the financial interest (proprietorship, net worth) of the owner --total assets equals the total liabilities plus total owner's equity
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 02-06 Define the accounting terms new to this chapter. Level: Medium Topic: The Accounting Equation and Financial Statements
2-56 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
Chapter 03 Analyzing Business Transactions Using T Accounts True / False Questions
1. When preparing the trial balance, the total debits should equal the total credits. True False
2. Credits increase Liabilities, Owner's Equity, and Revenue. True False
3. Increases in assets and expenses are both recorded with debits. True False
4. Increases in assets and revenue are both recorded with debits. True False
5. On a typical chart of accounts, the accounts are arranged in the same order as they appear in the trial balance. True False
6. When an owner invests assets in a business, the capital account is debited. True False
7. If the total of the amounts on the debit side of an account is greater than the total on the credit side, the balance is recorded on the debit side. True False
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Chapter 03 - Analyzing Business Transactions Using T Accounts
8. Utilities Expense would be debited when a company receives a bill for utilities that it will pay later. True False
9. Debit entries increase asset, drawing, expense and liability accounts. True False
10. The normal balance side of a liability account is the debit side. True False
11. Increases in owner's equity are recorded with credits. True False
12. Revenue is a subdivision of owner's equity. True False
13. An increase in an expense results in an increase in owner's equity. True False
14. Increases in the owner's drawing account are recorded with debits. True False
15. After transactions for the period have been recorded, a trial balance is prepared to verify the equality of total debits and credits. True False
3-2 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
16. A business transaction affects at least two accounts. True False
17. The modern system of accounting is called the double-entry system because a debit to one account is balanced by a credit to another account. True False
18. Permanent accounts are used to account for the change in owner's equity during the accounting period. True False
19. Financial statements are prepared after the trial balance is prepared. True False
20. A trial balance usually has no mathematical errors if the total debit amount equals total the credit amount. True False
21. Another name for permanent accounts is real accounts. True False
22. The Income Statement is prepared first because the Net Income amount is a line item on the Balance Sheet. True False
23. Another name for temporary accounts is real accounts. True False
3-3 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
24. When developing a chart of accounts, the highest block of numbers is assigned to asset accounts. True False
25. An account whose balance is transferred to another account at the end of an accounting period is a temporary account. True False
26. An account with a balance that carries over from one accounting period to another is a nominal account. True False
Fill in the Blank Questions
27. Separate written records called ____________________ are kept for each asset and liability and for the owner's equity of a business. ________________________________________
28. Accountants use the term ____________________ when referring to the right side of an account. ________________________________________
29. A chart of accounts is a list of accounts that makes it possible to easily identify account ____________________ and names. ________________________________________
30. A decrease in a liability is recorded on the ____________________ side of the account. ________________________________________
3-4 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
31. Revenue and expense accounts are called nominal or ____________________ accounts. ________________________________________
32. Expense accounts are increased by ____________________ the accounts. ________________________________________
33. When equipment is purchased for cash, the accountant enters an amount on the left side of the ____________________ account. ________________________________________
34. A(n) ____________________ account is used to record increases in owner's equity from the sale of goods or services. ________________________________________
35. The difference between the debit and credit side of an account is called the account ____________________. ________________________________________
36. A column of figures is added and the total is entered in small pencil figures called a(n) ____________________. ________________________________________
37. The increase side of an account represents the ____________________ balance of the account. ________________________________________
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Chapter 03 - Analyzing Business Transactions Using T Accounts
38. A statement prepared to test the accuracy of the financial records is called a(n) ____________________. ________________________________________
39. A special type of owner's equity account set up to record withdrawals of assets by the owner for personal use is called a(n) ____________________ account. ________________________________________
40. The error that occurs when the number $5.00 is written as $50.00 is called a(n) ____________________ error. ________________________________________
41. The error that occurs when the number $272.00 is written as $27.20 is called a(n) ____________________ error. ________________________________________
42. An entry on the right side of an account is called a(n) ____________________. ________________________________________
43. An entry on the left side of an account is called a(n) ____________________. ________________________________________
44. Rent Revenue is increased by _________________ the account. ________________________________________
45. Another name for the profit and loss statement is the _____________________. ________________________________________
3-6 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
46. The account Moriah Paige, _______________ would appear on both the Statement of Owner's Equity and the Balance Sheet. ________________________________________
47. The order in which financial statements are prepared is determined by the fact that information from one is needed to prepare the next. Which statement is prepared last? _____________________. ________________________________________
48. In a Chart of Accounts, each category of accounts is given a __________ of numbers with gaps so that additional accounts can be added when needed. ________________________________________
Multiple Choice Questions
49. Which of the following entries records the withdrawal of cash for personal use by Ty Knott, the owner of a business? A. Debit Cash and credit Ty Knott, Capital B. Debit Cash and credit Salary Expense C. Debit Salary Expense and credit Cash D. Debit Ty Knott, Drawing, and credit Cash
50. The ending capital balance appears on which of the following statement(s)? A. Statement of owner's equity B. Income Statement C. Statement of owner's equity and balance sheet D. Statement of owner's equity and income statement
3-7 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
51. On a statement of owner's equity, beginning capital is $30,000, Net Income for the year is $11,000 and Drawing for the year is $6,000, the ending capital amount would be A. $30,000 B. $35,000 C. $47,000 D. $25,000
52. A business purchases supplies on account. The journal entry to record this transaction is: A. Debit to Cash; Credit Supplies B. Debit to Supplies; Credit Accounts Receivable C. Debit Supplies; Credit Accounts Payable D. Debit Supplies; Credit to Cash
53. Debits are used to record A. increases in assets. B. increases in revenue. C. increases in owner's equity. D. increases in liabilities.
54. Which of the following represents the proper sequence for preparing the financial statements. A. Balance sheet, statement of owner's equity, income statement. B. Income statement, balance sheet, statement of owner's equity. C. Income statement, statement of owner's equity, balance sheet. D. Statement of owner's equity, income statement, balance sheet.
55. Which of the following is not one of the formal financial statements that is made available to all users of the financial statements. A. Trial Balance B. Income Statement C. Statement of Owner's Equity D. Balance Sheet
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Chapter 03 - Analyzing Business Transactions Using T Accounts
56. A business pays a creditor on account. The journal entry to record this transaction is: A. Debit Accounts Payable; Credit Cash B. Debit Accounts Receivable; Credit Accounts Payable C. Debit Cash; Credit Accounts Payable D. Debit Accounts Receivable; Credit to Cash
57. Credits are used to record A. decreases in assets and owner's equity and increases in liabilities. B. decreases in assets, liabilities, and owner's equity. C. decreases in liabilities and increases in assets and owner's equity. D. increases in liabilities and owner's equity.
58. Debits are used to record increases in A. assets and revenue. B. revenue and owner's equity. C. assets and expenses. D. assets and liabilities.
59. A firm paid cash to apply against a debt. To record this transaction, the accountant would A. debit Accounts Receivable and credit Cash. B. debit Accounts Payable and credit Cash. C. debit Cash and credit Accounts Payable. D. credit Cash and credit Accounts Payable.
60. When revenue is earned from charge-account sales, the accountant A. debits a revenue account and credits the capital account. B. debits Accounts Receivable and credits a revenue account. C. debits a revenue account and credits Accounts Receivable. D. debits Cash and credits a revenue account.
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Chapter 03 - Analyzing Business Transactions Using T Accounts
61. When charge customers pay cash to apply against their accounts, the amount is recorded A. on the left side of the Cash account and the right side of the Fees Income account. B. on the left side of the Accounts Payable account and the right side of the Cash account. C. on the left side of the Cash account and the right side of the Accounts Receivable account. D. on the left side of the Cash account and the left side of the Accounts Receivable account.
62. The total of the figures on the left side of a Cash account is $25,800. The total of the figures on the right side is $14,100. The balance of this account A. is $11,700 and would be recorded on the right side of the account. B. is $39,900 and would be recorded on the left side of the account. C. is $39,900 and would be recorded on the right side of the account. D. is $11,700 and would be recorded on the left side of the account.
63. The account used to record increases in owner's equity from the sale of goods or services is A. the revenue account. B. the Cash account. C. the capital account. D. the drawing account.
64. Which of the following types of accounts normally have debit balances? A. Assets and revenue B. Assets, liabilities, and owner's equity C. Expenses and assets D. Liabilities and owner's equity
65. Which of the following groups contain only accounts that normally have credit balances? A. Accounts Receivable and Fees Income B. Salaries Expense and Accounts Payable C. Fees Income and John Smith, Capital D. Accounts Payable and Equipment
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Chapter 03 - Analyzing Business Transactions Using T Accounts
66. If the trial balance totals are not equal, the error may have been caused by a transposition if the difference is divisible by A. 2. B. 7. C. 9. D. 5.
67. When the trial balance totals are not equal, the error may have been caused by recording a debit as a credit if the difference is divisible by A. 2. B. 7. C. 9. D. 5.
68. Which of the following increase owner's equity? A. Expenses B. Revenue C. Withdrawals D. Receiving cash from customers
69. If assets are numbered from 100-199, which of the following accounts would not be given a number in the 100 series? A. Supplies B. Accounts Payable C. Prepaid Rent D. Accounts Receivable
70. Which of the following accounts is not a permanent account? A. Cash B. Accounts Payable C. Salaries Expense D. Thomas Bernard, Capital
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Chapter 03 - Analyzing Business Transactions Using T Accounts
71. The "Net Income" or "Net Loss" is transferred from the income statement to the A. balance sheet. B. chart of accounts. C. statement of owner's equity. D. trial balance.
72. The normal balance of an account is the A. increase side of the account. B. decrease side of the account. C. the left side of the account. D. the right side of the account.
73. When there are several entries to one or both sides of an account, the total of those entries is entered in pencil. This is called A. balancing. B. verifying. C. totaling. D. footing.
74. If a trial balance is not in balance (the Debit and Credit columns are not equal), a logical first step is to A. check each account balance calculation. B. check each account balance in the general ledger to the trial balance number. C. check the addition of each column. D. divide the difference by either 9 or 2.
75. The Net Income amount from the Income Statement is used as a line item on which statement? A. The profit and loss statement B. The statement of owner's equity C. The balance sheet D. The trial balance
3-12 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
76. The ending balance of the capital account appears as a separate line item on what two statements? A. The trial balance and the income statement B. The statement of owner's equity and the income statement C. The statement of owner's equity and the balance sheet D. The income statement and the balance sheet
77. Which of the following accounts is NOT a nominal account? A. Salaries Expense B. Moriah Paige, Drawing C. Rent Revenue D. Office Supplies
78. An accounting system that involves recording the effects of each transaction as debits and credits is A. completing one T account. B. the double-entry system. C. preparing financial statements. D. analyzing a business transaction.
79. Which of the following does NOT describe a transposition? A. It is an error. B. It involves misplaced digits in a number. C. It causes the difference between the debit total and the credit total to be divisible by 2. D. It causes the trial balance to be out of balance.
80. Which of the following would result in an error when preparing the Trial Balance? A. Placing the Withdrawal account balance in the Debit column B. Placing a Revenue account balance in the Credit column C. Placing the balance in Prepaid Rent in the Credit column D. Placing the Accounts Payable balance in the Credit column
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Chapter 03 - Analyzing Business Transactions Using T Accounts
81. Which of the following would cause the Trial Balance to be out of balance? A. Placing the Capital account balance in the Credit column B. Placing the Equipment account balance in the Debit column C. Placing the Rent Expense account balance in the Debit column D. Placing the Accounts Receivable balance in the Credit column
82. Which of the following would cause the Debit column and the Credit column of the Trial Balance to be unequal? A. Placing the Fees Income balance in the Credit column B. Placing the Prepaid Rent balance in the Credit column C. Placing the Rent Expense balance in the Debit column D. Placing the Office Equipment balance in the Debit column
Short Answer Questions
Cash Accounts Receivable Office Equipment Office Supplies Accounts Payable Brandon Phipps, Capital Brandon Phipps, Drawing Fees Income Rent Expense Salaries Expense Utilities Expense Read each of the following transactions. Determine the accounts to be debited and credited.
83. Performed services for cash
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Chapter 03 - Analyzing Business Transactions Using T Accounts
84. Purchased office equipment on credit
85. Received cash from credit customers
86. Issued a check to a creditor
87. Performed services on credit
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Chapter 03 - Analyzing Business Transactions Using T Accounts
88. Received a credit for damaged office equipment that was returned
89. Issued checks to pay salaries
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Chapter 03 - Analyzing Business Transactions Using T Accounts
90. The consulting firm of Martin and Associates uses the accounts listed below. On a separate sheet of paper, set up T accounts for each of the accounts listed and record the balances on the normal balance side of the accounts.
The firm has the following transactions during the month of December 2013. Record the effects of these transactions in the T accounts. a. Paid $1,300 for one month's rent b. Collected $5,600 in cash from credit customers c. Performed services for $7,500 in cash d. Paid $4,800 for salaries e. Issued a check for $3,400 to a creditor f. Performed services for $10,200 on credit g. Purchased office equipment for $1,800 on credit h. The owner withdrew $3,500 in cash for personal expenses i. Issued a check for $650 to pay the monthly utility bill Determine the account balances after the transactions have been recorded. Prepare a trial balance as of December 31, 2013.
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Chapter 03 - Analyzing Business Transactions Using T Accounts
91. The account balances from the December 31, 2013, trial balance for Haman Accounting Services are shown below. Prepare an income statement, a statement of owner's equity, and a balance sheet for the month ended December 31, 2013.
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Chapter 03 - Analyzing Business Transactions Using T Accounts
The accounts and balances for Paw Prints Pet Sitters on November 1 are provided below.
The following transactions occurred during the month of November. a. Collected $350 from credit customers b. Issued a check for $700 for rent c. Paid $1,900 for salaries d. The owner withdrew $500 in cash for personal expenses e. Issued a check for $200 to pay the monthly utility bill f. Received $2,845 in cash for services performed g. Purchased office equipment for $1,350 on credit
92. Using the information shown, set up T accounts for all accounts. Determine the balance for each account after all transactions have been recorded.
93. Using the information shown, prepare a trial balance for Paw Prints Pet Sitters at November 30, 2013.
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Chapter 03 - Analyzing Business Transactions Using T Accounts
94. Using the information shown, prepare an income statement, statement of owner's equity, and balance sheet for Paw Prints Pet Sitters for the month ended November 30, 2013.
Conway Copy Shop is owned and operated by Gerald Conway. The shop's accounts are presented below. Review the transactions presented and determine the appropriate debits and credits to the affected accounts. Cash Accounts Receivable Copier Equipment Office Supplies Prepaid Rent Accounts Payable G. Conway, Capital G. Conway, Drawing Fees Income Rent Expense Utilities Expense Salaries Expense
95. Purchased copier equipment for $8,500 in cash
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Chapter 03 - Analyzing Business Transactions Using T Accounts
96. Received $1,200 in cash for copy services
97. Paid $6,000 in cash for the next six months rent
98. Purchased office supplies for $250 on credit
99. Issued a check for $3,400 to pay salaries
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Chapter 03 - Analyzing Business Transactions Using T Accounts
100. Issued a check for $250 to pay creditor for office supplies
101. Gerald Conway makes an additional investment of $2,800 in cash to his business
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Chapter 03 - Analyzing Business Transactions Using T Accounts
The accounts with their respective balances for Dom's Delivery Service as of June 1 are given below. All accounts have normal balances.
Dom's had the following transactions during the month of June. a. Paid rent for June, $1,000 b. Dominic Goggin withdrew $4,500 from the business for personal use c. Performed services for $4,000 in cash d. Performed services for $22,750 on credit e. Received $12,000 from credit customers on account f. Paid the administrative assistant salary of $2,000 and delivery service messenger/driver salary of $3,000 for the month by check g. Paid the electric and phone bills by check for a total of $600 h. Paid creditors $6,000 on account i. Purchased $7,500 in supplies on account. j. Paid $1,800 cash for advertising in the local newspaper in June
102. Using the information above, set up T accounts and enter transactions a-j. Foot each account as of June 30, 2013. Prepare a Trial Balance.
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Chapter 03 - Analyzing Business Transactions Using T Accounts
103. Using the information shown, create Chart of Accounts numbers for the accounts given for Dom's Delivery Service.
The T account balances for the accounts of Rya's Planning Services as of January 31, 2013 are listed below.
104. Using the information given for Rya's Planning Services, create a Trial Balance as of January 31, 2013.
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Chapter 03 - Analyzing Business Transactions Using T Accounts
105. Using the information given for Rya's Planning Services, create an Income Statement, Statement of Owner's Equity, and Balance Sheet for January 2013.
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Chapter 03 - Analyzing Business Transactions Using T Accounts
Chapter 03 Analyzing Business Transactions Using T Accounts Answer Key
True / False Questions
1. When preparing the trial balance, the total debits should equal the total credits. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
2. Credits increase Liabilities, Owner's Equity, and Revenue. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-01 Set up T accounts for assets; liabilities; and owner's equity. Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
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Chapter 03 - Analyzing Business Transactions Using T Accounts
3. Increases in assets and expenses are both recorded with debits. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-01 Set up T accounts for assets; liabilities; and owner's equity. Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
4. Increases in assets and revenue are both recorded with debits. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-01 Set up T accounts for assets; liabilities; and owner's equity. Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
5. On a typical chart of accounts, the accounts are arranged in the same order as they appear in the trial balance. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-07 Develop a chart of accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
6. When an owner invests assets in a business, the capital account is debited. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-27 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
7. If the total of the amounts on the debit side of an account is greater than the total on the credit side, the balance is recorded on the debit side. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-03 Determine the balance of an account. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
8. Utilities Expense would be debited when a company receives a bill for utilities that it will pay later. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
9. Debit entries increase asset, drawing, expense and liability accounts. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-01 Set up T accounts for assets; liabilities; and owner's equity. Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
10. The normal balance side of a liability account is the debit side. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-03 Determine the balance of an account. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
3-28 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
11. Increases in owner's equity are recorded with credits. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-01 Set up T accounts for assets; liabilities; and owner's equity. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
12. Revenue is a subdivision of owner's equity. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
13. An increase in an expense results in an increase in owner's equity. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
14. Increases in the owner's drawing account are recorded with debits. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-29 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
15. After transactions for the period have been recorded, a trial balance is prepared to verify the equality of total debits and credits. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
16. A business transaction affects at least two accounts. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
17. The modern system of accounting is called the double-entry system because a debit to one account is balanced by a credit to another account. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
18. Permanent accounts are used to account for the change in owner's equity during the accounting period. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-07 Develop a chart of accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-30 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
19. Financial statements are prepared after the trial balance is prepared. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-06 Prepare an income statement; a statement of owner's equity; and a balance sheet. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
20. A trial balance usually has no mathematical errors if the total debit amount equals total the credit amount. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
21. Another name for permanent accounts is real accounts. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-07 Develop a chart of accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
22. The Income Statement is prepared first because the Net Income amount is a line item on the Balance Sheet. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-06 Prepare an income statement; a statement of owner's equity; and a balance sheet. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-31 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
23. Another name for temporary accounts is real accounts. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-07 Develop a chart of accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
24. When developing a chart of accounts, the highest block of numbers is assigned to asset accounts. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-07 Develop a chart of accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
25. An account whose balance is transferred to another account at the end of an accounting period is a temporary account. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-08 Define the accounting terms new to this chapter. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
26. An account with a balance that carries over from one accounting period to another is a nominal account. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-08 Define the accounting terms new to this chapter. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-32 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
Fill in the Blank Questions
27. Separate written records called ____________________ are kept for each asset and liability and for the owner's equity of a business. accounts
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-01 Set up T accounts for assets; liabilities; and owner's equity. Learning Objective: 03-08 Define the accounting terms new to this chapter. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
28. Accountants use the term ____________________ when referring to the right side of an account. credit
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
29. A chart of accounts is a list of accounts that makes it possible to easily identify account ____________________ and names. numbers
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-07 Develop a chart of accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-33 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
30. A decrease in a liability is recorded on the ____________________ side of the account. debit; left
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-01 Set up T accounts for assets; liabilities; and owner's equity. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
31. Revenue and expense accounts are called nominal or ____________________ accounts. temporary
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-07 Develop a chart of accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
32. Expense accounts are increased by ____________________ the accounts. debiting
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
33. When equipment is purchased for cash, the accountant enters an amount on the left side of the ____________________ account. equipment
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
3-34 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
34. A(n) ____________________ account is used to record increases in owner's equity from the sale of goods or services. revenue
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
35. The difference between the debit and credit side of an account is called the account ____________________. balance
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-03 Determine the balance of an account. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
36. A column of figures is added and the total is entered in small pencil figures called a(n) ____________________. footing
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-03 Determine the balance of an account. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
37. The increase side of an account represents the ____________________ balance of the account. normal
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-03 Determine the balance of an account. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
3-35 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
38. A statement prepared to test the accuracy of the financial records is called a(n) ____________________. trial balance
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
39. A special type of owner's equity account set up to record withdrawals of assets by the owner for personal use is called a(n) ____________________ account. drawing
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
40. The error that occurs when the number $5.00 is written as $50.00 is called a(n) ____________________ error. slide
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
41. The error that occurs when the number $272.00 is written as $27.20 is called a(n) ____________________ error. slide
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-36 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
42. An entry on the right side of an account is called a(n) ____________________. credit
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-04 Set up T accounts for revenue and expenses. Learning Objective: 03-08 Define the accounting terms new to this chapter. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
43. An entry on the left side of an account is called a(n) ____________________. debit
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-04 Set up T accounts for revenue and expenses. Learning Objective: 03-08 Define the accounting terms new to this chapter. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
44. Rent Revenue is increased by _________________ the account. crediting
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
45. Another name for the profit and loss statement is the _____________________. Income Statement
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-06 Prepare an income statement; a statement of owner's equity; and a balance sheet. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-37 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
46. The account Moriah Paige, _______________ would appear on both the Statement of Owner's Equity and the Balance Sheet. Capital
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-06 Prepare an income statement; a statement of owner's equity; and a balance sheet. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
47. The order in which financial statements are prepared is determined by the fact that information from one is needed to prepare the next. Which statement is prepared last? _____________________. Balance Sheet
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-06 Prepare an income statement; a statement of owner's equity; and a balance sheet. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
48. In a Chart of Accounts, each category of accounts is given a __________ of numbers with gaps so that additional accounts can be added when needed. series
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-07 Develop a chart of accounts. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-38 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
Multiple Choice Questions
49. Which of the following entries records the withdrawal of cash for personal use by Ty Knott, the owner of a business? A. Debit Cash and credit Ty Knott, Capital B. Debit Cash and credit Salary Expense C. Debit Salary Expense and credit Cash D. Debit Ty Knott, Drawing, and credit Cash
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
50. The ending capital balance appears on which of the following statement(s)? A. Statement of owner's equity B. Income Statement C. Statement of owner's equity and balance sheet D. Statement of owner's equity and income statement
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-06 Prepare an income statement; a statement of owner's equity; and a balance sheet. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
51. On a statement of owner's equity, beginning capital is $30,000, Net Income for the year is $11,000 and Drawing for the year is $6,000, the ending capital amount would be A. $30,000 B. $35,000 C. $47,000 D. $25,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-06 Prepare an income statement; a statement of owner's equity; and a balance sheet. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-39 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
52. A business purchases supplies on account. The journal entry to record this transaction is: A. Debit to Cash; Credit Supplies B. Debit to Supplies; Credit Accounts Receivable C. Debit Supplies; Credit Accounts Payable D. Debit Supplies; Credit to Cash
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
53. Debits are used to record A. increases in assets. B. increases in revenue. C. increases in owner's equity. D. increases in liabilities.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-01 Set up T accounts for assets; liabilities; and owner's equity. Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
54. Which of the following represents the proper sequence for preparing the financial statements. A. Balance sheet, statement of owner's equity, income statement. B. Income statement, balance sheet, statement of owner's equity. C. Income statement, statement of owner's equity, balance sheet. D. Statement of owner's equity, income statement, balance sheet.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-06 Prepare an income statement; a statement of owner's equity; and a balance sheet. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-40 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
55. Which of the following is not one of the formal financial statements that is made available to all users of the financial statements. A. Trial Balance B. Income Statement C. Statement of Owner's Equity D. Balance Sheet
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
56. A business pays a creditor on account. The journal entry to record this transaction is: A. Debit Accounts Payable; Credit Cash B. Debit Accounts Receivable; Credit Accounts Payable C. Debit Cash; Credit Accounts Payable D. Debit Accounts Receivable; Credit to Cash
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
57. Credits are used to record A. decreases in assets and owner's equity and increases in liabilities. B. decreases in assets, liabilities, and owner's equity. C. decreases in liabilities and increases in assets and owner's equity. D. increases in liabilities and owner's equity.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-01 Set up T accounts for assets; liabilities; and owner's equity. Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-41 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
58. Debits are used to record increases in A. assets and revenue. B. revenue and owner's equity. C. assets and expenses. D. assets and liabilities.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 03-01 Set up T accounts for assets; liabilities; and owner's equity. Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
59. A firm paid cash to apply against a debt. To record this transaction, the accountant would A. debit Accounts Receivable and credit Cash. B. debit Accounts Payable and credit Cash. C. debit Cash and credit Accounts Payable. D. credit Cash and credit Accounts Payable.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
60. When revenue is earned from charge-account sales, the accountant A. debits a revenue account and credits the capital account. B. debits Accounts Receivable and credits a revenue account. C. debits a revenue account and credits Accounts Receivable. D. debits Cash and credits a revenue account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-42 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
61. When charge customers pay cash to apply against their accounts, the amount is recorded A. on the left side of the Cash account and the right side of the Fees Income account. B. on the left side of the Accounts Payable account and the right side of the Cash account. C. on the left side of the Cash account and the right side of the Accounts Receivable account. D. on the left side of the Cash account and the left side of the Accounts Receivable account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
62. The total of the figures on the left side of a Cash account is $25,800. The total of the figures on the right side is $14,100. The balance of this account A. is $11,700 and would be recorded on the right side of the account. B. is $39,900 and would be recorded on the left side of the account. C. is $39,900 and would be recorded on the right side of the account. D. is $11,700 and would be recorded on the left side of the account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-03 Determine the balance of an account. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
63. The account used to record increases in owner's equity from the sale of goods or services is A. the revenue account. B. the Cash account. C. the capital account. D. the drawing account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-43 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
64. Which of the following types of accounts normally have debit balances? A. Assets and revenue B. Assets, liabilities, and owner's equity C. Expenses and assets D. Liabilities and owner's equity
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 03-01 Set up T accounts for assets; liabilities; and owner's equity. Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Medium Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
65. Which of the following groups contain only accounts that normally have credit balances? A. Accounts Receivable and Fees Income B. Salaries Expense and Accounts Payable C. Fees Income and John Smith, Capital D. Accounts Payable and Equipment
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-01 Set up T accounts for assets; liabilities; and owner's equity. Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Medium Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
66. If the trial balance totals are not equal, the error may have been caused by a transposition if the difference is divisible by A. 2. B. 7. C. 9. D. 5.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-44 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
67. When the trial balance totals are not equal, the error may have been caused by recording a debit as a credit if the difference is divisible by A. 2. B. 7. C. 9. D. 5.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
68. Which of the following increase owner's equity? A. Expenses B. Revenue C. Withdrawals D. Receiving cash from customers
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
69. If assets are numbered from 100-199, which of the following accounts would not be given a number in the 100 series? A. Supplies B. Accounts Payable C. Prepaid Rent D. Accounts Receivable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 03-07 Develop a chart of accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-45 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
70. Which of the following accounts is not a permanent account? A. Cash B. Accounts Payable C. Salaries Expense D. Thomas Bernard, Capital
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 03-07 Develop a chart of accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
71. The "Net Income" or "Net Loss" is transferred from the income statement to the A. balance sheet. B. chart of accounts. C. statement of owner's equity. D. trial balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-06 Prepare an income statement; a statement of owner's equity; and a balance sheet. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
72. The normal balance of an account is the A. increase side of the account. B. decrease side of the account. C. the left side of the account. D. the right side of the account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-03 Determine the balance of an account. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
3-46 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
73. When there are several entries to one or both sides of an account, the total of those entries is entered in pencil. This is called A. balancing. B. verifying. C. totaling. D. footing.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-03 Determine the balance of an account. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
74. If a trial balance is not in balance (the Debit and Credit columns are not equal), a logical first step is to A. check each account balance calculation. B. check each account balance in the general ledger to the trial balance number. C. check the addition of each column. D. divide the difference by either 9 or 2.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
75. The Net Income amount from the Income Statement is used as a line item on which statement? A. The profit and loss statement B. The statement of owner's equity C. The balance sheet D. The trial balance
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 03-06 Prepare an income statement; a statement of owner's equity; and a balance sheet. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-47 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
76. The ending balance of the capital account appears as a separate line item on what two statements? A. The trial balance and the income statement B. The statement of owner's equity and the income statement C. The statement of owner's equity and the balance sheet D. The income statement and the balance sheet
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-06 Prepare an income statement; a statement of owner's equity; and a balance sheet. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
77. Which of the following accounts is NOT a nominal account? A. Salaries Expense B. Moriah Paige, Drawing C. Rent Revenue D. Office Supplies
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 03-07 Develop a chart of accounts. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
78. An accounting system that involves recording the effects of each transaction as debits and credits is A. completing one T account. B. the double-entry system. C. preparing financial statements. D. analyzing a business transaction.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-48 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
79. Which of the following does NOT describe a transposition? A. It is an error. B. It involves misplaced digits in a number. C. It causes the difference between the debit total and the credit total to be divisible by 2. D. It causes the trial balance to be out of balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 03-05 Prepare a trial balance from T accounts. Learning Objective: 03-08 Define the accounting terms new to this chapter. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
80. Which of the following would result in an error when preparing the Trial Balance? A. Placing the Withdrawal account balance in the Debit column B. Placing a Revenue account balance in the Credit column C. Placing the balance in Prepaid Rent in the Credit column D. Placing the Accounts Payable balance in the Credit column
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
81. Which of the following would cause the Trial Balance to be out of balance? A. Placing the Capital account balance in the Credit column B. Placing the Equipment account balance in the Debit column C. Placing the Rent Expense account balance in the Debit column D. Placing the Accounts Receivable balance in the Credit column
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 03-03 Determine the balance of an account. Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Medium Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-49 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
82. Which of the following would cause the Debit column and the Credit column of the Trial Balance to be unequal? A. Placing the Fees Income balance in the Credit column B. Placing the Prepaid Rent balance in the Credit column C. Placing the Rent Expense balance in the Debit column D. Placing the Office Equipment balance in the Debit column
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 03-03 Determine the balance of an account. Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Medium Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
Short Answer Questions
Cash Accounts Receivable Office Equipment Office Supplies Accounts Payable Brandon Phipps, Capital Brandon Phipps, Drawing Fees Income Rent Expense Salaries Expense Utilities Expense Read each of the following transactions. Determine the accounts to be debited and credited.
3-50 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
83. Performed services for cash Debit Cash; credit Fees Income
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
84. Purchased office equipment on credit Debit Office Equipment; credit Accounts Payable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
85. Received cash from credit customers Debit Cash; credit Accounts Receivable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-51 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
86. Issued a check to a creditor Debit Accounts Payable; credit Cash
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
87. Performed services on credit Debit Accounts Receivable; credit Fees Income
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
88. Received a credit for damaged office equipment that was returned Debit Accounts Payable; credit Office Equipment
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Easy Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
3-52 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
89. Issued checks to pay salaries Debit Salaries Expense; credit Cash
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Easy Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-53 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
90. The consulting firm of Martin and Associates uses the accounts listed below. On a separate sheet of paper, set up T accounts for each of the accounts listed and record the balances on the normal balance side of the accounts.
The firm has the following transactions during the month of December 2013. Record the effects of these transactions in the T accounts. a. Paid $1,300 for one month's rent b. Collected $5,600 in cash from credit customers c. Performed services for $7,500 in cash d. Paid $4,800 for salaries e. Issued a check for $3,400 to a creditor f. Performed services for $10,200 on credit g. Purchased office equipment for $1,800 on credit h. The owner withdrew $3,500 in cash for personal expenses i. Issued a check for $650 to pay the monthly utility bill Determine the account balances after the transactions have been recorded. Prepare a trial balance as of December 31, 2013.
3-54 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
3-55 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 03-01 Set up T accounts for assets; liabilities; and owner's equity. Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Learning Objective: 03-03 Determine the balance of an account. Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Medium Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-56 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
91. The account balances from the December 31, 2013, trial balance for Haman Accounting Services are shown below. Prepare an income statement, a statement of owner's equity, and a balance sheet for the month ended December 31, 2013.
3-57 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 03-06 Prepare an income statement; a statement of owner's equity; and a balance sheet. Level: Hard Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-58 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
The accounts and balances for Paw Prints Pet Sitters on November 1 are provided below.
The following transactions occurred during the month of November. a. Collected $350 from credit customers b. Issued a check for $700 for rent c. Paid $1,900 for salaries d. The owner withdrew $500 in cash for personal expenses e. Issued a check for $200 to pay the monthly utility bill f. Received $2,845 in cash for services performed g. Purchased office equipment for $1,350 on credit
92. Using the information shown, set up T accounts for all accounts. Determine the balance for each account after all transactions have been recorded.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-01 Set up T accounts for assets; liabilities; and owner's equity. Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Learning Objective: 03-03 Determine the balance of an account. Learning Objective: 03-04 Set up T accounts for revenue and expenses. Level: Medium Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
3-59 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
93. Using the information shown, prepare a trial balance for Paw Prints Pet Sitters at November 30, 2013.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
3-60 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
94. Using the information shown, prepare an income statement, statement of owner's equity, and balance sheet for Paw Prints Pet Sitters for the month ended November 30, 2013.
3-61 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
3-62 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 03-06 Prepare an income statement; a statement of owner's equity; and a balance sheet. Level: Hard Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
Conway Copy Shop is owned and operated by Gerald Conway. The shop's accounts are presented below. Review the transactions presented and determine the appropriate debits and credits to the affected accounts. Cash Accounts Receivable Copier Equipment Office Supplies Prepaid Rent Accounts Payable G. Conway, Capital G. Conway, Drawing Fees Income Rent Expense Utilities Expense Salaries Expense
95. Purchased copier equipment for $8,500 in cash Debit Copier Equipment $8,500; credit Cash $8,500
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Medium Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
3-63 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
96. Received $1,200 in cash for copy services Debit Cash $1,200; credit Fees Income $1,200
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Medium Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
97. Paid $6,000 in cash for the next six months rent Debit Prepaid Rent $6,000; credit Cash $6,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Medium Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
98. Purchased office supplies for $250 on credit Debit Office Supplies $250; credit Accounts Payable $250
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Medium Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
3-64 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
99. Issued a check for $3,400 to pay salaries Debit Salaries Expense $3,400; credit Cash $3,400
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Medium Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
100. Issued a check for $250 to pay creditor for office supplies Debit Accounts Payable $250; credit Cash $250
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Medium Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
101. Gerald Conway makes an additional investment of $2,800 in cash to his business Debit Cash $2,800; credit G. Conway, Capital $2,800
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Level: Medium Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity
3-65 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
The accounts with their respective balances for Dom's Delivery Service as of June 1 are given below. All accounts have normal balances.
Dom's had the following transactions during the month of June. a. Paid rent for June, $1,000 b. Dominic Goggin withdrew $4,500 from the business for personal use c. Performed services for $4,000 in cash d. Performed services for $22,750 on credit e. Received $12,000 from credit customers on account f. Paid the administrative assistant salary of $2,000 and delivery service messenger/driver salary of $3,000 for the month by check g. Paid the electric and phone bills by check for a total of $600 h. Paid creditors $6,000 on account i. Purchased $7,500 in supplies on account. j. Paid $1,800 cash for advertising in the local newspaper in June
3-66 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 03 - Analyzing Business Transactions Using T Accounts
102. Using the information above, set up T accounts and enter transactions a-j. Foot each account as of June 30, 2013. Prepare a Trial Balance.
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Chapter 03 - Analyzing Business Transactions Using T Accounts
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Chapter 03 - Analyzing Business Transactions Using T Accounts
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Chapter 03 - Analyzing Business Transactions Using T Accounts
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 03-01 Set up T accounts for assets; liabilities; and owner's equity. Learning Objective: 03-02 Analyze business transactions and enter them in the accounts. Learning Objective: 03-03 Determine the balance of an account. Learning Objective: 03-04 Set up T accounts for revenue and expenses. Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Hard Topic: Transactions That Affect Assets, Liabilities, and Owner's Equity Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
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Chapter 03 - Analyzing Business Transactions Using T Accounts
103. Using the information shown, create Chart of Accounts numbers for the accounts given for Dom's Delivery Service. Note: Student answers will vary. Look for basic numbering blocks with categories in the same block. Whether or not titles are required is at the instructor's discretion.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 03-07 Develop a chart of accounts. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
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Chapter 03 - Analyzing Business Transactions Using T Accounts
The T account balances for the accounts of Rya's Planning Services as of January 31, 2013 are listed below.
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Chapter 03 - Analyzing Business Transactions Using T Accounts
104. Using the information given for Rya's Planning Services, create a Trial Balance as of January 31, 2013.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 03-05 Prepare a trial balance from T accounts. Level: Medium Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
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Chapter 03 - Analyzing Business Transactions Using T Accounts
105. Using the information given for Rya's Planning Services, create an Income Statement, Statement of Owner's Equity, and Balance Sheet for January 2013.
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Chapter 03 - Analyzing Business Transactions Using T Accounts
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Chapter 03 - Analyzing Business Transactions Using T Accounts
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 03-06 Prepare an income statement; a statement of owner's equity; and a balance sheet. Level: Hard Topic: Transactions That Affect Revenue, Expenses, and Withdrawals
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Chapter 04 - The General Journal and the General Ledger
Chapter 04 The General Journal and the General Ledger True / False Questions
1. When transactions are entered in a general journal, the asset accounts are listed first, followed by the liability and owner's equity accounts. True False
2. When a transaction is entered in a general journal, the first account title is indented about half an inch from the left margin of the Description column. True False
3. A ledger account contains a complete record of the individual transaction activity in each account. True False
4. Account names are written in the general journal exactly as they appear in the chart of accounts. True False
5. Transactions are entered in the journal in chronological order. True False
6. A journal entry can consist of no more than one account to be debited and one account to be credited. True False
7. A ledger is sometimes referred to as a record of original entry. True False
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Chapter 04 - The General Journal and the General Ledger
8. Transactions are recorded in either a journal or a ledger, but not in both. True False
9. An amount debited to Cash in a journal entry should be posted as a credit to the Cash account in the ledger. True False
10. The balance ledger form always shows the current balance of an account. True False
11. The number of the journal page is recorded in the Posting Reference column of the ledger account to indicate that the total debits equal total credits. True False
12. Posting references are part of the audit trail. True False
13. The revenue accounts come before the expense accounts in the general ledger. True False
14. Posting references provide a useful cross-reference when entries must be traced and verified. True False
15. If a journal entry that contains an error has already been posted, a correcting entry should be journalized and posted. True False
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Chapter 04 - The General Journal and the General Ledger
16. If an error is discovered before the entry is posted, the incorrect amount can be erased and the correct amount recorded. True False
Fill in the Blank Questions
17. When a transaction is entered in the general journal, the account to be _________________ is always recorded first in the Description column. ________________________________________
18. The ____________________ is a chain of references that makes it possible to trace information about transactions through the accounting process. ________________________________________
19. A description should accompany each entry made in the ____________________ journal. ________________________________________
20. A journal is referred to as a record of ____________________ entry. ________________________________________
21. The effects of each transaction are recorded in a financial record called a(n) ____________________. ________________________________________
22. The process of recording transactions in a journal is referred to as ____________________. ________________________________________
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Chapter 04 - The General Journal and the General Ledger
23. A journal entry containing more than one debit or more than one credit is called a(n) ____________________ entry. ________________________________________
24. The ledger is referred to as the record of ____________________ entry. ________________________________________
25. The number of the ____________________ is recorded in the Posting Reference column of the journal. ________________________________________
26. The process of transferring data from a journal to a ledger is known as ____________________. ________________________________________
27. The printed forms used for accounts appear on separate sheets in a book or a binder called a(n) ____________________. ________________________________________
28. Notations that allow transactions to be quickly and easily traced from the journal to the ledger or from the ledger to the journal are called ____________________ references. ________________________________________
29. The number of the ____________________ is recorded in the Posting Reference column of the ledger account. ________________________________________
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Chapter 04 - The General Journal and the General Ledger
30. Posting is the ____________________ step in the accounting cycle. ________________________________________
31. A(n) ____________________ entry is recorded when there is an error in data that has been journalized and posted. ________________________________________
Multiple Choice Questions
32. Which of the following statements is not correct? A. The description of a journal entry should include a reference to the source of the information contained in the entry. B. If goods are purchased on credit, the supplier's invoice number is used as the source document for the transaction. C. The credit portion of a general journal entry is always recorded first. D. A firm should be able to trace amounts through the accounting records and back to their source documents.
33. When an entry is made in the general journal, A. the accounts to be credited should be indented. B. the first account entered should be indented. C. liability, capital, and revenue accounts should be indented. D. asset accounts should be indented.
34. When an entry is made in the general journal, A. assets should be listed first. B. accounts to be debited should be listed first. C. accounts to be increased should be listed first. D. accounts may be listed in any order.
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Chapter 04 - The General Journal and the General Ledger
35. The journal entry to record the sale of services on credit should include A. a debit to Accounts Receivable and a credit to Capital. B. a debit to Cash and a credit to Accounts Receivable. C. a debit to Fees Income and a credit to Accounts Receivable. D. a debit to Accounts Receivable and a credit to Fees Income.
36. If a transaction is properly analyzed and recorded, A. only two accounts will be used to record the transaction. B. one account balance will increase and another will decrease. C. one asset account will be debited and one liability account will be credited. D. the total amount debited will equal the total amount credited.
37. The journal entry to record the payment of a monthly utility bill would include A. a debit to Utilities Expense and a credit to Capital. B. a debit to Capital and a credit to Cash. C. a debit to Utilities Expense and a credit to Cash. D. a debit to Utilities Expense and a credit to Accounts Payable.
38. The journal entry to record the performance of services for cash would include A. a debit to Cash and a credit to Fees Income. B. a debit to Fees Income and a credit to Cash. C. a debit to Cash and a credit to Accounts Receivable. D. a debit to Accounts Receivable and a credit to Cash.
39. The journal entry to record the receipt of cash from credit clients on account would include A. a debit to Cash and a credit to Fees Income. B. a debit to Fees Income and a credit to Cash. C. a debit to Cash and a credit to Accounts Receivable. D. a debit to Accounts Receivable and a credit to Cash.
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Chapter 04 - The General Journal and the General Ledger
40. The journal entry to record the withdrawal of cash by Sue Snow, the owner, to pay a personal utility bill would include A. a debit to Sue Snow, Capital, and a credit to Cash. B. a debit to Utilities Expense and a credit to Cash. C. a debit to Sue Snow, Drawing and a credit to Cash. D. a debit to Sue Snow, Drawing and a credit to Utilities Expense.
41. The journal entry to record a payment made in January for rent for the months of February and March would include A. a debit to Sue Snow, Capital, and a credit to Cash. B. a debit to Rent Expense and a credit to Cash. C. a debit to Prepaid Rent and a credit to Cash. D. a debit to Sue Snow, Drawing and a credit to Rent Expense.
42. The journal entry to record the payment of salaries should include A. a debit to Salaries Expense and a credit to Cash. B. a debit to Capital and a credit to Cash. C. a debit to Cash and a credit to Salaries Expense. D. a debit to Salaries Expense and a credit to Accounts Payable.
43. Which of the following statements is correct? A. For every transaction recorded in the general journal, the year, month, and day on which the event occurred are written in the Date column. B. When a transaction is journalized, the total of the amounts debited must equal the total of the amounts credited. C. Journalizing transactions is the last step of the accounting cycle. D. The general journal cannot accommodate every type of transaction that a business may have.
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Chapter 04 - The General Journal and the General Ledger
44. On July 3, the ABC Company received $865 in cash on account from customers. The correct journal entry is A. debit Cash, $865; credit Income from Services, $865 B. debit Cash, $865; credit Accounts Payable, $865 C. debit Accounts Receivable, $865; credit Cash, $865 D. debit Cash, $865; credit Accounts Receivable, $865
45. The first place a transaction is recorded is in the: A. source document B. general ledger C. journal D. trial balance
46. Business papers, such as checks, invoices, receipts, letters, and memos, that furnish proof that a transaction has taken place are called A. ledgers B. source documents C. debit entries D. accounts
47. The owner of the business would like to see the debit and credit entry for a specific transaction, he would look in A. the chart of accounts B. the journal C. the source document D. the ledger
48. A purchase of office equipment for $380 cash is journalized as: A. Debit Office Equipment; Credit Accounts Payable B. Debit Office Equipment; Credit Cash C. Debit Equipment Expense; Credit Cash D. Debit Cash; Credit Office Equipment
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Chapter 04 - The General Journal and the General Ledger
49. The process of transferring the data from the journal into the ledgers is called: A. footing B. posting C. transponding D. journalizing
50. The journal entry to record $2,450 of revenue earned and received in cash by Agatha Panthis Landscape Architect Company is: A. Debit Fees Income; Credit Accounts Receivable B. Debit Cash; Credit Fees Income C. Debit Fees Income; Credit Cash D. Debit Accounts Receivable; Credit Fees Income
51. The journal entry to record the payment of salaries for the month is: A. Debit Salaries; Credit Accounts Payable B. Debit Cash; Credit Salaries Expense C. Debit Salaries Expense; Credit Cash D. Debit Cash; Credit Salaries Payable
52. Anna Conda Landscaping service received a bill for the utilities used during September. The bill will be paid in October. The journal entry to record the utility bill received is: A. Debit Utilities Expense; Credit Accounts Payable B. Debit Cash; Credit Utilities Expense C. Debit Utilities Expense; Credit Cash D. Debit Accounts Payable; Credit Cash
53. Which of the following statements is correct? A. All transactions require compound entries. B. Compound entries include only debits. C. Accounts being debited should always follow the accounts being credited in a compound entry. D. Compound entries affect more than one debit and/or more than one credit.
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Chapter 04 - The General Journal and the General Ledger
54. The journal entry to record the purchase of equipment for a $100 cash down payment and a balance of $400 due in 30 days would include A. a debit to Equipment for $100 and a credit to Cash for $100. B. a debit to Equipment for $500, a credit to Cash for $100, and a credit to Accounts Payable for $400. C. a debit to Equipment for $100 and a credit to Accounts Payable for $400. D. debit to Equipment for $500 and a credit to Cash for $500.
55. The general ledger accounts are usually arranged in the following order: A. first the balance sheet accounts, then the income statement accounts. B. first the accounts with debit balances, then the accounts with credit balances. C. first the temporary accounts, then the permanent accounts. D. first the accounts used most often, then those used less frequently.
56. The Accounts Payable account has a $3,000 credit balance. An entry for the payment of $1,000 on the amount owed is recorded and posted. The new balance of the Accounts Payable account is A. a $2,000 credit balance. B. a $4,000 credit balance. C. a $2,000 debit balance. D. a $4,000 debit balance.
57. The Cash account has a $15,000 debit balance. A $5,000 credit entry and a $7,000 debit entry are posted to the account. The final balance of the Cash account is A. a $3,000 debit balance. B. a $27,000 debit balance. C. a $13,000 debit balance. D. a $17,000 debit balance.
58. The account numbers are recorded in the Posting Reference column of the general journal A. as the transaction is journalized. B. after each amount is posted. C. after all entries on the journal page have been posted. D. as the first amount written in the journal.
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Chapter 04 - The General Journal and the General Ledger
59. The Posting Reference column of a journal is used to A. record the date on which an amount is posted to a ledger account. B. record the number of the ledger account to which the information is posted. C. record the number of amounts posted to that ledger account since the beginning of the current accounting period. D. record the page number of the ledger account.
60. Which of the following statements is correct? A. The general ledger contains the accounts that are used to prepare the financial statements. B. Some companies use the general ledger instead of a general journal. C. When entries are posted from the general journal to the general ledger, the account number is written in the Posting Reference column in the general ledger. D. When entries are posted from the general journal to the general ledger, the page number is written in the Posting Reference column in the general journal.
61. If a journal entry that contains an error has already been posted, A. the incorrect items should be erased and replaced with the correct data. B. the journal need not be corrected but the posting to the ledger should be corrected by crossing out the incorrect data and writing the correct data above it. C. a correcting entry should be journalized and posted. D. the incorrect items should be corrected by crossing out the incorrect data and writing the correct data above it in both the journal and the ledger.
62. A firm purchased telephone equipment for cash. By mistake, the person who recorded the transaction debited Utilities Expense instead of Office Equipment. The error was discovered after the data was posted. The correcting entry should contain A. a debit to Office Equipment and a credit to Cash. B. a debit to Office Equipment and a credit to Utilities Expense. C. a debit to Cash and a credit to Office Equipment. D. a debit to Utilities Expense and a credit to Cash.
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Chapter 04 - The General Journal and the General Ledger
63. Bertrand Inc. performed services for clients in the amount of $1,350 on credit. If this transaction had been posted in error to the Cash account instead of the Accounts Receivable account, what correcting entry would be necessary? A. Debit Accounts Receivable $1,350; credit Cash $1,350 B. Debit Cash $1,350; credit Accounts Receivable $1,350 C. Debit Accounts Receivable $1,350; credit Fees Income $1,350 D. Debit Fees Income $1,350; credit Cash $1,350
64. Bertrand Inc. purchased some shop equipment for $4,500 in cash. By mistake, the journal entry debited the Office Equipment account rather than the Shop Equipment account. What correcting entry would be necessary? A. Debit Office Equipment $4,500; credit Shop Equipment $4,500 B. Debit Shop Equipment $4,500; credit Office Equipment $4,500 C. Debit Cash $4,500; credit Shop Equipment $4,500 D. Debit Office Equipment $4,500; credit Cash $4,500
65. Which of the following statements is correct? A. All errors made in journal entries should be corrected by the preparation of a correcting journal entry. B. If an error in a journal entry is discovered before the entry is posted to the general ledger, the entry can simply be erased and replaced with the correct journal entry. C. If an error in a journal entry is discovered before the entry is posted to the general ledger, the error in the entry should be crossed out and the correct data written above it. D. If an error in a journal entry is discovered before the entry is posted to the general ledger, a journal entry should be made to correct the erroneous entry.
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Chapter 04 - The General Journal and the General Ledger
Short Answer Questions
66. For each of the accounts listed below, enter the words, Increase or Decrease, in the Debit and Credit columns to indicate the effects of each on the account balance. The first row has been completed for reference.
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Chapter 04 - The General Journal and the General Ledger
67. For each of the accounts listed below, enter the words, Increase or Decrease, the Debit and Credit columns to indicate the effects of each on the account balance. The first row has been completed for reference.
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Chapter 04 - The General Journal and the General Ledger
68. For each of the accounts listed below, enter the words, Increase or Decrease, the Debit and Credit columns to indicate the effects of each on the account balance.
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Chapter 04 - The General Journal and the General Ledger
69. Indicate how each of the following would be reflected in the journal entry required to record the effects described by using debit or credit to indicate the increase or decrease in each affected account.
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Chapter 04 - The General Journal and the General Ledger
70. Indicate how each of the following would be reflected in the journal entry required to record the effects described by using debit or credit to indicate the increase or decrease in each affected account.
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Chapter 04 - The General Journal and the General Ledger
71. Indicate how each of the following would be reflected in the journal entry required to record the effects described by using debit or credit to indicate the increase or decrease in each affected account.
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Chapter 04 - The General Journal and the General Ledger
72. Determine the accounts and amounts to be debited and credited for the following transactions for Madison's Clock Repair. A. Purchased new equipment for $1,700 by issuing a check for $1,000 as a down payment with the balance due in 30 days. B. Issued checks for $2,400 to pay the employees their monthly salaries. C. Issued a check for $700 to pay a creditor on account. D. Purchased supplies for $200 cash. E. Provided services for $6,800 on credit. F. Returned damaged supplies and received a $50 cash refund. G. Issued a check for $100 to pay the monthly telephone bill.
73. Determine the accounts and amounts to be debited and credited for the following transactions for Folk Furniture Repair. A. Issued a check for $950 to pay the monthly rent. B. Purchased $130 worth of supplies on credit. C. The owner made an additional investment of $5,000 in cash. D. Sent a $75 check to the utility company to pay the monthly bill. E. Performed services for cash in the amount of $1,200. F. Provided services on credit in the amount of $800. G. Purchased new equipment for $300 and paid for it immediately by check. H. Issued a $1,000 check to pay a creditor on account. I. Collected $500 from credit customers.
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Chapter 04 - The General Journal and the General Ledger
74. Determine the accounts and amounts to be debited and credited for the following transactions for Monroe's Auto Repair. A. Marilyn Monroe invested $50,000 in cash to start the firm B. Issued check for $4,000 to pay the rent for current month C. Purchased an automobile that will be used to visit clients; issued check for $32,500 in full payment D. Purchased supplies for $800; paid immediately by check E. Purchased office equipment for $18,500 on credit from Denton, Inc.; received invoice, payable in 30 days F. Performed services for $2,580 in cash G. Returned damaged supplies for a cash refund of $50 H. Issued check for $15,600 to Denton, Inc., as payment on account I. Paid $120 for monthly telephone bill by check J. Withdrew $500 in cash for personal expenses
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Chapter 04 - The General Journal and the General Ledger
75. The accounts with identification letters for Orly Delivery Services are listed below.
During the current month, the company completed the transactions listed below. Indicate the appropriate journal entry that needs to be recorded for each transaction by providing the account letter and amount. Some entries may need more than one debit and/or more than one credit. The first transaction is completed as an example.
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Chapter 04 - The General Journal and the General Ledger
76. The accounts with identification letters for Smart Delivery Services are listed below.
During the current month, the company completed the transactions listed below. Indicate the appropriate journal entry that needs to be recorded for each transaction by providing the account letter and amount. Some entries may need more than one debit and/or more than one credit. The first transaction is completed as an example.
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Chapter 04 - The General Journal and the General Ledger
77. The accounts with identification letters for Sealy Delivery Services are listed below.
During the current month, the company completed the transactions listed below. Indicate the appropriate journal entry that needs to be recorded for each transaction by providing the account letter and amount. Some entries may need more than one debit and/or more than one credit. The first transaction is completed as an example.
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Chapter 04 - The General Journal and the General Ledger
78. The accounts with identification letters for Able Delivery Services are listed below.
During January, the company completed the transactions listed below. Indicate the appropriate journal entry that needs to be recorded for each transaction by providing the account letter and amount. Some entries may need more than one debit and/or more than one credit. The first transaction is completed as an example.
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Chapter 04 - The General Journal and the General Ledger
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Chapter 04 - The General Journal and the General Ledger
79. Antonio Baldez operates a delivery service. During the month of April, the firm had the following transactions. Record these transactions on page 5 of a general journal. Omit the descriptions.
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Chapter 04 - The General Journal and the General Ledger
80. Maria Sanchez operates a typing service. During the month of July, the first month of operations, the firm had the following transactions. Record these transactions on page 5 of a general journal. Omit the descriptions.
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Chapter 04 - The General Journal and the General Ledger
81. Lourdes Yabar opened a computer repair business on May 1, 2010. During the first month of operations, the firm had the following transactions. Record these transactions on page 1 of the general journal. Omit the descriptions. Set up a Cash general ledger account and post the appropriate transactions to this account, account 101.
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Chapter 04 - The General Journal and the General Ledger
82. Global Delivery opened for business on July 1, 2010. The company uses the general ledger accounts listed below. During the first month of business, the firm had the transactions listed below. Record the transactions on page 1 of a general journal. Omit descriptions. Set up a Cash general ledger account and post the appropriate transactions to this account, account 101.
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Chapter 04 - The General Journal and the General Ledger
83. The following errors in recording the transactions for June were discovered in the general journal the next month after the data had been posted to the ledger. Record the necessary correcting entries on page 2 of a general journal. Omit the descriptions.
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Chapter 04 - The General Journal and the General Ledger
84. The following errors in recording the transactions for December were discovered in the general journal the next month after the data had been posted to the ledger. Record the necessary correcting entries on page 12 of a general journal. Omit the descriptions.
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Chapter 04 - The General Journal and the General Ledger
Matching Questions
85. Match the accounting terms with the description by entering the proper number. 1. The record of original entry 2. A permanent, classified record of all accounts used in a firm's operation; a record of final entry 3. A journal entry made to correct an erroneous entry 4. A chain of references that makes it possible to trace information, locate errors, and prevent fraud 5. A ledger account form that shows the balance of the account after each entry is posted 6. The record of final entry 7. Organized in the order in which the events occur 8. A series of steps performed during each accounting period to classify, record, and summarize data for a business and to produce needed financial information 9. Transferring data from a journal to a ledger 10. Recording transactions in a journal 11. A journal entry with more than one debit or credit 12. A financial record for entering all types of business transactions; a record of original entry
General journal ____ Posting ____ Accounting cycle ____ General ledger ____ Journalizing ____ Balance ledger form ____ Compound entry ____ Chronological order ____ Audit trail ____ Correcting entry ____ Journal ____ Ledger ____
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Chapter 04 - The General Journal and the General Ledger
Chapter 04 The General Journal and the General Ledger Answer Key
True / False Questions
1. When transactions are entered in a general journal, the asset accounts are listed first, followed by the liability and owner's equity accounts. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
2. When a transaction is entered in a general journal, the first account title is indented about half an inch from the left margin of the Description column. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
3. A ledger account contains a complete record of the individual transaction activity in each account. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Easy Topic: The General Ledger
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Chapter 04 - The General Journal and the General Ledger
4. Account names are written in the general journal exactly as they appear in the chart of accounts. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
5. Transactions are entered in the journal in chronological order. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
6. A journal entry can consist of no more than one account to be debited and one account to be credited. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-02 Prepare compound journal entries. Level: Medium Topic: The General Journal
7. A ledger is sometimes referred to as a record of original entry. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Easy Topic: The General Ledger
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Chapter 04 - The General Journal and the General Ledger
8. Transactions are recorded in either a journal or a ledger, but not in both. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Easy Topic: The General Ledger
9. An amount debited to Cash in a journal entry should be posted as a credit to the Cash account in the ledger. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Easy Topic: The General Ledger
10. The balance ledger form always shows the current balance of an account. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Easy Topic: The General Ledger
11. The number of the journal page is recorded in the Posting Reference column of the ledger account to indicate that the total debits equal total credits. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Medium Topic: The General Ledger
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Chapter 04 - The General Journal and the General Ledger
12. Posting references are part of the audit trail. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
13. The revenue accounts come before the expense accounts in the general ledger. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Medium Topic: The General Ledger
14. Posting references provide a useful cross-reference when entries must be traced and verified. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Easy Topic: The General Ledger
15. If a journal entry that contains an error has already been posted, a correcting entry should be journalized and posted. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-04 Correct errors made in the journal or ledger. Level: Easy Topic: The General Ledger
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Chapter 04 - The General Journal and the General Ledger
16. If an error is discovered before the entry is posted, the incorrect amount can be erased and the correct amount recorded. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-04 Correct errors made in the journal or ledger. Level: Medium Topic: The General Ledger
Fill in the Blank Questions
17. When a transaction is entered in the general journal, the account to be _________________ is always recorded first in the Description column. debited
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
18. The ____________________ is a chain of references that makes it possible to trace information about transactions through the accounting process. audit trail
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 04-01 Record transactions in the general journal. Learning Objective: 04-05 Define the accounting terms new to this chapter. Level: Medium Topic: The General Journal Topic: The General Ledger
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Chapter 04 - The General Journal and the General Ledger
19. A description should accompany each entry made in the ____________________ journal. general
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
20. A journal is referred to as a record of ____________________ entry. original
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
21. The effects of each transaction are recorded in a financial record called a(n) ____________________. journal
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
22. The process of recording transactions in a journal is referred to as ____________________. journalizing
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-01 Record transactions in the general journal. Learning Objective: 04-05 Define the accounting terms new to this chapter. Level: Easy Topic: The General Journal Topic: The General Ledger
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Chapter 04 - The General Journal and the General Ledger
23. A journal entry containing more than one debit or more than one credit is called a(n) ____________________ entry. compound
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-02 Prepare compound journal entries. Learning Objective: 04-05 Define the accounting terms new to this chapter. Level: Easy Topic: The General Journal Topic: The General Ledger
24. The ledger is referred to as the record of ____________________ entry. final
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-03 Post journal entries to general ledger accounts. Learning Objective: 04-05 Define the accounting terms new to this chapter. Level: Medium Topic: The General Ledger
25. The number of the ____________________ is recorded in the Posting Reference column of the journal. ledger account
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Medium Topic: The General Ledger
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Chapter 04 - The General Journal and the General Ledger
26. The process of transferring data from a journal to a ledger is known as ____________________. posting
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-03 Post journal entries to general ledger accounts. Learning Objective: 04-05 Define the accounting terms new to this chapter. Level: Easy Topic: The General Ledger
27. The printed forms used for accounts appear on separate sheets in a book or a binder called a(n) ____________________. ledger
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Medium Topic: The General Ledger
28. Notations that allow transactions to be quickly and easily traced from the journal to the ledger or from the ledger to the journal are called ____________________ references. posting
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Medium Topic: The General Ledger
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Chapter 04 - The General Journal and the General Ledger
29. The number of the ____________________ is recorded in the Posting Reference column of the ledger account. journal page
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Medium Topic: The General Ledger
30. Posting is the ____________________ step in the accounting cycle. third
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Medium Topic: The General Ledger
31. A(n) ____________________ entry is recorded when there is an error in data that has been journalized and posted. correcting
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-04 Correct errors made in the journal or ledger. Learning Objective: 04-05 Define the accounting terms new to this chapter. Level: Medium Topic: The General Ledger
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Chapter 04 - The General Journal and the General Ledger
Multiple Choice Questions
32. Which of the following statements is not correct? A. The description of a journal entry should include a reference to the source of the information contained in the entry. B. If goods are purchased on credit, the supplier's invoice number is used as the source document for the transaction. C. The credit portion of a general journal entry is always recorded first. D. A firm should be able to trace amounts through the accounting records and back to their source documents.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
33. When an entry is made in the general journal, A. the accounts to be credited should be indented. B. the first account entered should be indented. C. liability, capital, and revenue accounts should be indented. D. asset accounts should be indented.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
34. When an entry is made in the general journal, A. assets should be listed first. B. accounts to be debited should be listed first. C. accounts to be increased should be listed first. D. accounts may be listed in any order.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
35. The journal entry to record the sale of services on credit should include A. a debit to Accounts Receivable and a credit to Capital. B. a debit to Cash and a credit to Accounts Receivable. C. a debit to Fees Income and a credit to Accounts Receivable. D. a debit to Accounts Receivable and a credit to Fees Income.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
36. If a transaction is properly analyzed and recorded, A. only two accounts will be used to record the transaction. B. one account balance will increase and another will decrease. C. one asset account will be debited and one liability account will be credited. D. the total amount debited will equal the total amount credited.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 04-01 Record transactions in the general journal. Learning Objective: 04-02 Prepare compound journal entries. Level: Medium Topic: The General Journal
37. The journal entry to record the payment of a monthly utility bill would include A. a debit to Utilities Expense and a credit to Capital. B. a debit to Capital and a credit to Cash. C. a debit to Utilities Expense and a credit to Cash. D. a debit to Utilities Expense and a credit to Accounts Payable.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
38. The journal entry to record the performance of services for cash would include A. a debit to Cash and a credit to Fees Income. B. a debit to Fees Income and a credit to Cash. C. a debit to Cash and a credit to Accounts Receivable. D. a debit to Accounts Receivable and a credit to Cash.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
39. The journal entry to record the receipt of cash from credit clients on account would include A. a debit to Cash and a credit to Fees Income. B. a debit to Fees Income and a credit to Cash. C. a debit to Cash and a credit to Accounts Receivable. D. a debit to Accounts Receivable and a credit to Cash.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
40. The journal entry to record the withdrawal of cash by Sue Snow, the owner, to pay a personal utility bill would include A. a debit to Sue Snow, Capital, and a credit to Cash. B. a debit to Utilities Expense and a credit to Cash. C. a debit to Sue Snow, Drawing and a credit to Cash. D. a debit to Sue Snow, Drawing and a credit to Utilities Expense.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
41. The journal entry to record a payment made in January for rent for the months of February and March would include A. a debit to Sue Snow, Capital, and a credit to Cash. B. a debit to Rent Expense and a credit to Cash. C. a debit to Prepaid Rent and a credit to Cash. D. a debit to Sue Snow, Drawing and a credit to Rent Expense.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
42. The journal entry to record the payment of salaries should include A. a debit to Salaries Expense and a credit to Cash. B. a debit to Capital and a credit to Cash. C. a debit to Cash and a credit to Salaries Expense. D. a debit to Salaries Expense and a credit to Accounts Payable.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
43. Which of the following statements is correct? A. For every transaction recorded in the general journal, the year, month, and day on which the event occurred are written in the Date column. B. When a transaction is journalized, the total of the amounts debited must equal the total of the amounts credited. C. Journalizing transactions is the last step of the accounting cycle. D. The general journal cannot accommodate every type of transaction that a business may have.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
44. On July 3, the ABC Company received $865 in cash on account from customers. The correct journal entry is A. debit Cash, $865; credit Income from Services, $865 B. debit Cash, $865; credit Accounts Payable, $865 C. debit Accounts Receivable, $865; credit Cash, $865 D. debit Cash, $865; credit Accounts Receivable, $865
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
45. The first place a transaction is recorded is in the: A. source document B. general ledger C. journal D. trial balance
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
46. Business papers, such as checks, invoices, receipts, letters, and memos, that furnish proof that a transaction has taken place are called A. ledgers B. source documents C. debit entries D. accounts
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
47. The owner of the business would like to see the debit and credit entry for a specific transaction, he would look in A. the chart of accounts B. the journal C. the source document D. the ledger
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
48. A purchase of office equipment for $380 cash is journalized as: A. Debit Office Equipment; Credit Accounts Payable B. Debit Office Equipment; Credit Cash C. Debit Equipment Expense; Credit Cash D. Debit Cash; Credit Office Equipment
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
49. The process of transferring the data from the journal into the ledgers is called: A. footing B. posting C. transponding D. journalizing
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Medium Topic: The General Ledger
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Chapter 04 - The General Journal and the General Ledger
50. The journal entry to record $2,450 of revenue earned and received in cash by Agatha Panthis Landscape Architect Company is: A. Debit Fees Income; Credit Accounts Receivable B. Debit Cash; Credit Fees Income C. Debit Fees Income; Credit Cash D. Debit Accounts Receivable; Credit Fees Income
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
51. The journal entry to record the payment of salaries for the month is: A. Debit Salaries; Credit Accounts Payable B. Debit Cash; Credit Salaries Expense C. Debit Salaries Expense; Credit Cash D. Debit Cash; Credit Salaries Payable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
52. Anna Conda Landscaping service received a bill for the utilities used during September. The bill will be paid in October. The journal entry to record the utility bill received is: A. Debit Utilities Expense; Credit Accounts Payable B. Debit Cash; Credit Utilities Expense C. Debit Utilities Expense; Credit Cash D. Debit Accounts Payable; Credit Cash
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
4-48 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 04 - The General Journal and the General Ledger
53. Which of the following statements is correct? A. All transactions require compound entries. B. Compound entries include only debits. C. Accounts being debited should always follow the accounts being credited in a compound entry. D. Compound entries affect more than one debit and/or more than one credit.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 04-02 Prepare compound journal entries. Level: Medium Topic: The General Journal
54. The journal entry to record the purchase of equipment for a $100 cash down payment and a balance of $400 due in 30 days would include A. a debit to Equipment for $100 and a credit to Cash for $100. B. a debit to Equipment for $500, a credit to Cash for $100, and a credit to Accounts Payable for $400. C. a debit to Equipment for $100 and a credit to Accounts Payable for $400. D. debit to Equipment for $500 and a credit to Cash for $500.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-02 Prepare compound journal entries. Level: Medium Topic: The General Journal
55. The general ledger accounts are usually arranged in the following order: A. first the balance sheet accounts, then the income statement accounts. B. first the accounts with debit balances, then the accounts with credit balances. C. first the temporary accounts, then the permanent accounts. D. first the accounts used most often, then those used less frequently.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Medium Topic: The General Ledger
4-49 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 04 - The General Journal and the General Ledger
56. The Accounts Payable account has a $3,000 credit balance. An entry for the payment of $1,000 on the amount owed is recorded and posted. The new balance of the Accounts Payable account is A. a $2,000 credit balance. B. a $4,000 credit balance. C. a $2,000 debit balance. D. a $4,000 debit balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Medium Topic: The General Ledger
57. The Cash account has a $15,000 debit balance. A $5,000 credit entry and a $7,000 debit entry are posted to the account. The final balance of the Cash account is A. a $3,000 debit balance. B. a $27,000 debit balance. C. a $13,000 debit balance. D. a $17,000 debit balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Easy Topic: The General Ledger
58. The account numbers are recorded in the Posting Reference column of the general journal A. as the transaction is journalized. B. after each amount is posted. C. after all entries on the journal page have been posted. D. as the first amount written in the journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Medium Topic: The General Ledger
4-50 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 04 - The General Journal and the General Ledger
59. The Posting Reference column of a journal is used to A. record the date on which an amount is posted to a ledger account. B. record the number of the ledger account to which the information is posted. C. record the number of amounts posted to that ledger account since the beginning of the current accounting period. D. record the page number of the ledger account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Medium Topic: The General Ledger
60. Which of the following statements is correct? A. The general ledger contains the accounts that are used to prepare the financial statements. B. Some companies use the general ledger instead of a general journal. C. When entries are posted from the general journal to the general ledger, the account number is written in the Posting Reference column in the general ledger. D. When entries are posted from the general journal to the general ledger, the page number is written in the Posting Reference column in the general journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Medium Topic: The General Ledger
61. If a journal entry that contains an error has already been posted, A. the incorrect items should be erased and replaced with the correct data. B. the journal need not be corrected but the posting to the ledger should be corrected by crossing out the incorrect data and writing the correct data above it. C. a correcting entry should be journalized and posted. D. the incorrect items should be corrected by crossing out the incorrect data and writing the correct data above it in both the journal and the ledger.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-04 Correct errors made in the journal or ledger. Level: Medium Topic: The General Ledger
4-51 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 04 - The General Journal and the General Ledger
62. A firm purchased telephone equipment for cash. By mistake, the person who recorded the transaction debited Utilities Expense instead of Office Equipment. The error was discovered after the data was posted. The correcting entry should contain A. a debit to Office Equipment and a credit to Cash. B. a debit to Office Equipment and a credit to Utilities Expense. C. a debit to Cash and a credit to Office Equipment. D. a debit to Utilities Expense and a credit to Cash.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-04 Correct errors made in the journal or ledger. Level: Medium Topic: The General Ledger
63. Bertrand Inc. performed services for clients in the amount of $1,350 on credit. If this transaction had been posted in error to the Cash account instead of the Accounts Receivable account, what correcting entry would be necessary? A. Debit Accounts Receivable $1,350; credit Cash $1,350 B. Debit Cash $1,350; credit Accounts Receivable $1,350 C. Debit Accounts Receivable $1,350; credit Fees Income $1,350 D. Debit Fees Income $1,350; credit Cash $1,350
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-04 Correct errors made in the journal or ledger. Level: Medium Topic: The General Ledger
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Chapter 04 - The General Journal and the General Ledger
64. Bertrand Inc. purchased some shop equipment for $4,500 in cash. By mistake, the journal entry debited the Office Equipment account rather than the Shop Equipment account. What correcting entry would be necessary? A. Debit Office Equipment $4,500; credit Shop Equipment $4,500 B. Debit Shop Equipment $4,500; credit Office Equipment $4,500 C. Debit Cash $4,500; credit Shop Equipment $4,500 D. Debit Office Equipment $4,500; credit Cash $4,500
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-04 Correct errors made in the journal or ledger. Level: Medium Topic: The General Ledger
65. Which of the following statements is correct? A. All errors made in journal entries should be corrected by the preparation of a correcting journal entry. B. If an error in a journal entry is discovered before the entry is posted to the general ledger, the entry can simply be erased and replaced with the correct journal entry. C. If an error in a journal entry is discovered before the entry is posted to the general ledger, the error in the entry should be crossed out and the correct data written above it. D. If an error in a journal entry is discovered before the entry is posted to the general ledger, a journal entry should be made to correct the erroneous entry.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 04-04 Correct errors made in the journal or ledger. Level: Hard Topic: The General Ledger
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Chapter 04 - The General Journal and the General Ledger
Short Answer Questions
66. For each of the accounts listed below, enter the words, Increase or Decrease, in the Debit and Credit columns to indicate the effects of each on the account balance. The first row has been completed for reference.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
67. For each of the accounts listed below, enter the words, Increase or Decrease, the Debit and Credit columns to indicate the effects of each on the account balance. The first row has been completed for reference.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
68. For each of the accounts listed below, enter the words, Increase or Decrease, the Debit and Credit columns to indicate the effects of each on the account balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
69. Indicate how each of the following would be reflected in the journal entry required to record the effects described by using debit or credit to indicate the increase or decrease in each affected account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Level: Easy Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
70. Indicate how each of the following would be reflected in the journal entry required to record the effects described by using debit or credit to indicate the increase or decrease in each affected account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
71. Indicate how each of the following would be reflected in the journal entry required to record the effects described by using debit or credit to indicate the increase or decrease in each affected account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
72. Determine the accounts and amounts to be debited and credited for the following transactions for Madison's Clock Repair. A. Purchased new equipment for $1,700 by issuing a check for $1,000 as a down payment with the balance due in 30 days. B. Issued checks for $2,400 to pay the employees their monthly salaries. C. Issued a check for $700 to pay a creditor on account. D. Purchased supplies for $200 cash. E. Provided services for $6,800 on credit. F. Returned damaged supplies and received a $50 cash refund. G. Issued a check for $100 to pay the monthly telephone bill. A. Equipment (dr. $1,700); Cash (cr. $1,000) and Accounts Payable (cr. $700) B. Salaries Expense (dr. $2,400); Cash (cr. $2,400) C. Accounts Payable (dr. $700); Cash (cr. $700) D. Supplies (dr. $200); Cash (cr. $200) E. Accounts Receivable (dr. $6,800); Fees Income (cr. $6,800) F. Cash (dr. $50); Supplies (cr. $50) G. Telephone Expense (dr. $100); Cash (cr. $100)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Learning Objective: 04-02 Prepare compound journal entries. Level: Medium Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
73. Determine the accounts and amounts to be debited and credited for the following transactions for Folk Furniture Repair. A. Issued a check for $950 to pay the monthly rent. B. Purchased $130 worth of supplies on credit. C. The owner made an additional investment of $5,000 in cash. D. Sent a $75 check to the utility company to pay the monthly bill. E. Performed services for cash in the amount of $1,200. F. Provided services on credit in the amount of $800. G. Purchased new equipment for $300 and paid for it immediately by check. H. Issued a $1,000 check to pay a creditor on account. I. Collected $500 from credit customers. A. Rent Expense (dr.$950); Cash (cr.$950) B. Supplies (dr.$130); Accounts Payable (cr.$130) C. Cash (dr.$5,000); Folk, Capital (cr.$5,000) D. Utilities Expense (dr.$75); Cash (cr.$75) E. Cash (dr.$1,200); Fees Income (cr.$1,200) F. Accounts Receivable (dr.$800); Fees Income (cr.$800) G. Equipment (dr.$300); Cash (cr.$300) H. Accounts Payable (dr.$1,000 ); Cash (cr.$1,000) I. Cash (dr.$500); Accounts Receivable (cr.$500)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Learning Objective: 04-02 Prepare compound journal entries. Level: Medium Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
74. Determine the accounts and amounts to be debited and credited for the following transactions for Monroe's Auto Repair. A. Marilyn Monroe invested $50,000 in cash to start the firm B. Issued check for $4,000 to pay the rent for current month C. Purchased an automobile that will be used to visit clients; issued check for $32,500 in full payment D. Purchased supplies for $800; paid immediately by check E. Purchased office equipment for $18,500 on credit from Denton, Inc.; received invoice, payable in 30 days F. Performed services for $2,580 in cash G. Returned damaged supplies for a cash refund of $50 H. Issued check for $15,600 to Denton, Inc., as payment on account I. Paid $120 for monthly telephone bill by check J. Withdrew $500 in cash for personal expenses A. Cash (dr. $50,000); Marilyn Monroe, Capital (cr. $50,000) B. Rent Expense (dr. $4,000); Cash (cr. $4,000) C. Automobile (dr. $32,500); Cash (cr. $32,500) D. Supplies (dr. $800); Cash (cr. $800) E. Office Equipment (dr. $18,500); Accounts Payable (cr. $18,500) F. Cash (dr. $2,580); Fees Income (cr. $2,580) G. Cash (dr. $50); Supplies (cr. $50) H. Accounts Payable (dr. $15,600); Cash (cr. $15,600) I. Telephone Expense (dr. $120); Cash (cr. $120) J. Marilyn Monroe, Drawing (dr. $500); Cash (cr. $500)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Learning Objective: 04-02 Prepare compound journal entries. Level: Medium Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
75. The accounts with identification letters for Orly Delivery Services are listed below.
During the current month, the company completed the transactions listed below. Indicate the appropriate journal entry that needs to be recorded for each transaction by providing the account letter and amount. Some entries may need more than one debit and/or more than one credit. The first transaction is completed as an example.
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Chapter 04 - The General Journal and the General Ledger
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
76. The accounts with identification letters for Smart Delivery Services are listed below.
During the current month, the company completed the transactions listed below. Indicate the appropriate journal entry that needs to be recorded for each transaction by providing the account letter and amount. Some entries may need more than one debit and/or more than one credit. The first transaction is completed as an example.
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Chapter 04 - The General Journal and the General Ledger
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
77. The accounts with identification letters for Sealy Delivery Services are listed below.
During the current month, the company completed the transactions listed below. Indicate the appropriate journal entry that needs to be recorded for each transaction by providing the account letter and amount. Some entries may need more than one debit and/or more than one credit. The first transaction is completed as an example.
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Chapter 04 - The General Journal and the General Ledger
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Learning Objective: 04-02 Prepare compound journal entries. Level: Hard Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
78. The accounts with identification letters for Able Delivery Services are listed below.
During January, the company completed the transactions listed below. Indicate the appropriate journal entry that needs to be recorded for each transaction by providing the account letter and amount. Some entries may need more than one debit and/or more than one credit. The first transaction is completed as an example.
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Chapter 04 - The General Journal and the General Ledger
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Chapter 04 - The General Journal and the General Ledger
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Learning Objective: 04-02 Prepare compound journal entries. Level: Hard Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
79. Antonio Baldez operates a delivery service. During the month of April, the firm had the following transactions. Record these transactions on page 5 of a general journal. Omit the descriptions.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Level: Medium Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
80. Maria Sanchez operates a typing service. During the month of July, the first month of operations, the firm had the following transactions. Record these transactions on page 5 of a general journal. Omit the descriptions.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Learning Objective: 04-02 Prepare compound journal entries. Level: Medium Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
81. Lourdes Yabar opened a computer repair business on May 1, 2010. During the first month of operations, the firm had the following transactions. Record these transactions on page 1 of the general journal. Omit the descriptions. Set up a Cash general ledger account and post the appropriate transactions to this account, account 101.
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Chapter 04 - The General Journal and the General Ledger
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Chapter 04 - The General Journal and the General Ledger
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Learning Objective: 04-02 Prepare compound journal entries. Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Hard Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
82. Global Delivery opened for business on July 1, 2010. The company uses the general ledger accounts listed below. During the first month of business, the firm had the transactions listed below. Record the transactions on page 1 of a general journal. Omit descriptions. Set up a Cash general ledger account and post the appropriate transactions to this account, account 101.
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Chapter 04 - The General Journal and the General Ledger
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Chapter 04 - The General Journal and the General Ledger
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-01 Record transactions in the general journal. Learning Objective: 04-02 Prepare compound journal entries. Learning Objective: 04-03 Post journal entries to general ledger accounts. Level: Hard Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
83. The following errors in recording the transactions for June were discovered in the general journal the next month after the data had been posted to the ledger. Record the necessary correcting entries on page 2 of a general journal. Omit the descriptions.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-04 Correct errors made in the journal or ledger. Level: Hard Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
84. The following errors in recording the transactions for December were discovered in the general journal the next month after the data had been posted to the ledger. Record the necessary correcting entries on page 12 of a general journal. Omit the descriptions.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 04-04 Correct errors made in the journal or ledger. Level: Hard Topic: The General Journal
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Chapter 04 - The General Journal and the General Ledger
Matching Questions
85. Match the accounting terms with the description by entering the proper number. 1. The record of original entry 2. A permanent, classified record of all accounts used in a firm's operation; a record of final entry 3. A journal entry made to correct an erroneous entry 4. A chain of references that makes it possible to trace information, locate errors, and prevent fraud 5. A ledger account form that shows the balance of the account after each entry is posted 6. The record of final entry 7. Organized in the order in which the events occur 8. A series of steps performed during each accounting period to classify, record, and summarize data for a business and to produce needed financial information 9. Transferring data from a journal to a ledger 10. Recording transactions in a journal 11. A journal entry with more than one debit or credit 12. A financial record for entering all types of business transactions; a record of original entry
General journal 12 Posting 9 Accounting cycle 8 General ledger 2 Journalizing 10 Balance ledger form 5 Compound entry 11 Chronological order 7 Audit trail 4 Correcting entry 3 Journal 1 Ledger 6
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 04-01 Record transactions in the general journal. Learning Objective: 04-02 Prepare compound journal entries. Learning Objective: 04-03 Post journal entries to general ledger accounts. Learning Objective: 04-04 Correct errors made in the journal or ledger. Learning Objective: 04-05 Define the accounting terms new to this chapter. Level: Medium Topic: The General Journal Topic: The General Ledger
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Chapter 05 - Adjustments and the Worksheet
Chapter 05 Adjustments and the Worksheet True / False Questions
1. All changes in account balances are caused by transactions between the business and another business or individual. True False
2. Prepaid expenses, such as prepaid rent and prepaid insurance, represent assets for a business until they are used. True False
3. The cost of a long-term asset, such as equipment, is transferred to expense as it is used during its life. True False
4. If an adjustment is not recorded for supplies used, the firm's assets will be overstated. True False
5. If an adjustment for expired rent is not recorded, the firm's expenses will be overstated. True False
6. The normal balance of a contra asset account is a debit. True False
7. Letters are used to label the debit and credit parts of an adjustment on the worksheet. True False
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Chapter 05 - Adjustments and the Worksheet
8. Land is a long-term asset that is not subject to depreciation. True False
9. The balances of the revenue accounts are recorded in the Trial Balance Credit column, the Adjusted Trial Balance Credit column, and the Balance Sheet Credit column of the worksheet. True False
10. Preparation of a worksheet eliminates the necessity of preparing an income statement and a balance sheet. True False
11. In the Adjusted Trial Balance section of the worksheet the total debits should equal the total credits. True False
12. The balance of the owner's drawing account is extended to the Income Statement Debit column of the worksheet. True False
13. The balance of a liability account is extended to the Balance Sheet Credit column of the worksheet. True False
14. The statement of owner's equity is prepared from the data in the Income Statement section of the worksheet. True False
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Chapter 05 - Adjustments and the Worksheet
15. If adjustments are entered on a worksheet, it is not necessary to record them in the journal or the ledger. True False
Fill in the Blank Questions
16. A(n) ____________________ is a comparison of the general ledger accounts with debit balances to the general ledger accounts with credit balances to make sure that the debit and credit totals are equal. ________________________________________
17. The process of allocating the cost of a long-term asset as an expense of operations during the asset's expected useful life is known as ____________________. ________________________________________
18. The difference between the debit balance of the Equipment account and the credit balance of the Accumulated Depreciation—Equipment account is called the ____________________ of an asset. ________________________________________
19. The Supplies account had a balance of $1,200 when a physical count indicated that supplies on hand totaled $400. This means that supplies in the amount of ____________________ were used during the accounting period. ________________________________________
20. The process of updating accounts at the end of an accounting period for previously unrecorded items that belong to the period is referred to as making ____________________. ________________________________________
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Chapter 05 - Adjustments and the Worksheet
21. The account credited in the adjusting entry made to record the expiration of a portion of prepaid rent is the ____________________ account. ________________________________________
22. An accumulated depreciation account is often referred to as a(n) ____________________ asset account. ________________________________________
23. Expense items that are acquired and paid for in advance of their use are called ____________________ expenses. ________________________________________
24. If equipment has ____________________ value, it can be sold for additional use or for scrap. ________________________________________
25. When the ____________________ method of depreciation is used, an equal amount of depreciation is charged to each accounting period during the asset's useful life. ________________________________________
26. An accumulated depreciation account has a normal ____________________ balance. ________________________________________
27. A(n) ____________________ is prepared at the end of each accounting period to organize and summarize the data needed for the preparation of the financial statements. ________________________________________
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Chapter 05 - Adjustments and the Worksheet
28. On a worksheet, the adjusted balance of Supplies is extended from the Adjusted Trial Balance Debit column to the ____________________ Debit column. ________________________________________
29. On a worksheet, the adjusted balance of Depreciation Expense is extended from the Adjusted Trial Balance Debit column to the ____________________ Debit column. ________________________________________
30. When the liabilities and owner's equity section is listed under the assets section, the firm is using the ____________________ form balance sheet. ________________________________________
Multiple Choice Questions
31. Which of the following need not be completed separately if a worksheet is prepared? A. a trial balance B. an income statement C. a balance sheet D. a statement of owner's equity
32. When a trial balance is in balance, A. adjusting entries are not required. B. the general ledger is free of errors. C. the debit account balances equal the credit account balances. D. the company has earned a net income.
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Chapter 05 - Adjustments and the Worksheet
33. A total of $3,200 in supplies was purchased during the year. At the end of the year $700 of the supplies were left. The adjusting entry needed at the end of the year is: A. debit Supplies $2,500; credit Supplies Expense $2,500 B. debit Supplies Expense $3,200; credit Supplies $3,200 C. debit Supplies Expense $700; credit Supplies $700 D. debit Supplies Expense $2,500; credit Supplies $2,500
34. MacGyver Company bought equipment on January 3, 2013, for $34,000. At the time of purchase, the equipment was estimated to have a useful life of six years and a salvage value of $880. Using the straight-line method, the amount of one year's depreciation is A. $880 B. $5,520 C. $460 D. $5,667
35. Adjusting Entries are A. corrections of errors. B. needed for expenses that were paid for before or after they were used. C. not required. D. will always affect cash.
36. Equipment costing $13,500 with an estimated salvage value of $1,020 and an estimated life of 4 years was purchased on November 1, 2013. Using the straight-line depreciation method, what is the amount of depreciation expense to be recorded at December 31, 2013? A. $260 B. $520 C. $3,120 D. $1,020
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Chapter 05 - Adjustments and the Worksheet
37. Which of the following entries records the depreciation on equipment for the fiscal yearend adjustment? A. Debit Accumulated Depreciation; credit Depreciation Expense B. Debit Depreciation Expense; credit Equipment C. Debit Depreciation Expense; credit Accumulated Depreciation D. Debit Depreciation; credit Depreciation Expense
38. On October 1, 2013, Jay Walker Company purchased a one-year insurance policy for $660. The correct adjusting entry on December 31, 2013, is A. debit Insurance Expense $660; credit Prepaid Insurance $660 B. debit Insurance Expense $495; credit Prepaid Insurance $495 C. debit Prepaid Insurance $55; credit Insurance Expense $55 D. debit Insurance Expense $165; credit Prepaid Insurance $165
39. Equipment cost $36,000 and is expected to be useful for 5 years and have no salvage value. Under the straight-line method, monthly depreciation will be A. $600. B. $720. C. $60. D. $12.
40. On a worksheet, the adjusting entry to account for depreciation of equipment consists of A. a debit to Depreciation Expense and a credit to Equipment. B. a debit to Depreciation Expense and a credit to Accumulated Depreciation. C. a debit to Equipment and a credit to Accumulated Depreciation. D. a debit to Accumulated Depreciation and a credit to Equipment.
41. If the prepaid expenses are not adjusted, assets on the balance sheet A. will be overstated. B. will be understated. C. will not be affected. D. may be either overstated or understated.
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Chapter 05 - Adjustments and the Worksheet
42. If long-term assets are not adjusted, expenses on the income statement A. will be overstated. B. will be understated. C. will not be affected. D. may be either overstated or understated.
43. On November 25, 2013, the company paid $24,000 rent in advance for a six-month period (December 2013 through May 2014). On December 31, 2013, the adjustment for expired rent would include A. a $4,000 debit to Prepaid Rent. B. a $4,000 credit to Rent Expense. C. a $24,000 debit to Rent Expense. D. a $4,000 credit to Prepaid Rent.
44. The adjusting entry to account for the use of supplies consists of A. a debit to Supplies Expense and a credit to Supplies. B. a debit to Supplies and a credit to Supplies Expense. C. a debit to Supplies and a credit to Accumulated Depreciation. D. a debit to Accumulated Depreciation and a credit to Supplies.
45. The adjusting entry to account for the expiration of prepaid insurance consists of A. a debit to Insurance Expense and a credit to Prepaid Insurance. B. a debit to Insurance Expense and a credit to Accumulated Depreciation. C. a debit to Prepaid Insurance and a credit to Accumulated Depreciation. D. a debit to Accumulated Depreciation and a credit to Prepaid Insurance.
46. The adjusting entry to account for the expiration of prepaid advertising consists of A. a debit to Prepaid Advertising and a credit to Advertising Expense. B. a debit to Advertising Expense and a credit to Accumulated Depreciation. C. a debit to Prepaid Advertising and a credit to Accumulated Depreciation. D. a debit to Advertising Expense and a credit to Prepaid Advertising.
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Chapter 05 - Adjustments and the Worksheet
47. Which of the following statements is not correct? A. Generally accepted accounting principles require that the original cost of a long-term asset continue to appear in the asset account until the disposition of the asset. B. The book value of a long-term asset is reduced each year as depreciation is recorded. C. Buildings and trucks are examples of long-term assets. D. Salvage value is computed by subtracting the accumulated depreciation from the cost of a long-term asset.
48. On a worksheet, the adjusted balance of the Accumulated Depreciation account is extended to: A. the Income Statement Debit column. B. the Income Statement Credit column. C. the Balance Sheet Debit column. D. the Balance Sheet Credit column.
49. On a worksheet, the adjusted balance of the Depreciation Expense account is extended to: A. the Income Statement Debit column. B. the Income Statement Credit column. C. the Balance Sheet Debit column. D. the Balance Sheet Credit column.
50. On a worksheet, the adjusted balance of the Supplies account is extended to: A. the Income Statement Debit column. B. the Income Statement Credit column. C. the Balance Sheet Debit column. D. the Balance Sheet Credit column.
51. On a worksheet, the adjusted balance of the Supplies Expense account is extended to: A. the Income Statement Debit column. B. the Income Statement Credit column. C. the Balance Sheet Debit column. D. the Balance Sheet Credit column.
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Chapter 05 - Adjustments and the Worksheet
52. Which of the following statements is correct? A. The cost of supplies used is reported on the statement of owner's equity. B. The cost of supplies used represents an operating expense of the business. C. Accumulated Depreciation--Equipment is presented in the Liabilities section of a balance sheet. D. At the time of their acquisition, prepaid expenses are recorded in expense accounts.
53. On a worksheet, the adjusted balance of the Prepaid Rent account is extended to the: A. Income Statement Debit column. B. Income Statement Credit column. C. Balance Sheet Debit column. D. Balance Sheet Credit column.
54. On a worksheet, the adjusted balance of the revenue account Fees Income would be extended to: A. the Income Statement Debit column. B. the Balance Sheet Credit column. C. the Balance Sheet Debit column. D. the Income Statement Credit column.
55. On the worksheet, the Balance Sheet columns should balance A. before the net income amount is added to the Balance Sheet Debit column. B. after the net income amount is added to the Balance Sheet Debit column. C. after the net income amount is added to the Balance Sheet Credit column. D. before the net income amount is added to the Balance Sheet Credit column.
56. On a worksheet, the adjusted balance of a contra asset account would be extended to A. the Balance Sheet Debit column. B. the Balance Sheet Credit column. C. the Income Statement Debit column. D. the Income Statement Credit column.
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Chapter 05 - Adjustments and the Worksheet
57. On a worksheet, a net loss is A. recorded in the Income Statement Debit column. B. recorded in the Balance Sheet Debit column. C. recorded in the Balance Sheet Credit column. D. not recorded.
58. If a worksheet is prepared at the end of the accounting year, A. preparation of the financial statements is not required. B. the adjusting entries do not need to be journalized. C. only a balance sheet is required. D. the financial statements are prepared using the worksheet data.
59. Which of the following statements is not correct? A. The difference between the total of the Income Statement Debit column and the total of the Income Statement Credit column of the worksheet represents either net income or net loss. B. Net income is recorded on the worksheet in the Income Statement Debit column and the Balance Sheet Credit column. C. Only the balances of accounts that are affected by adjustments must be recalculated before they are recorded in the Adjusted Trial Balance section of the worksheet. D. If an account has a debit balance in the Trial Balance section of the worksheet and there is a credit entry in the Adjustments section, the credit amount is added when computing the balance to be shown in the Adjusted Trial Balance section of the worksheet.
60. On a balance sheet, Accumulated Depreciation—Equipment is reported A. as a deduction from the cost of the equipment. B. as a liability. C. as an expense. D. as a deduction from the total of the assets.
61. The book value of long-term assets is reported on A. the income statement. B. the statement of owner's equity. C. the balance sheet. D. the worksheet.
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Chapter 05 - Adjustments and the Worksheet
62. The balance in the account Accumulated Depreciation, Equipment will A. be reported on the Income Statement. B. be reported on the Statement of Owner's Equity. C. will be reported on the Balance Sheet. D. not appear on any financial statement.
63. A consecutive, twelve-month accounting period is called a(n) A. accrual year B. fiscal year C. accounting year D. adjusted year
64. Accumulated Depreciation, Equipment, is shown as: A. a liability on the Balance Sheet B. a reduction of Capital on the Statement of Owner's Equity C. a contra asset on the Balance Sheet D. an expense on the Income Statement
65. The adjustments made on the worksheet A. are posted to the ledger but are not recorded in the journal. B. are recorded in the journal but are not posted to the ledger. C. need not be entered in the journal or the ledger. D. are recorded in the journal and then posted to the general ledger accounts.
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Chapter 05 - Adjustments and the Worksheet
Short Answer Questions
66. For each of the accounts listed below, enter the words, Increase or Decrease, in the Debit and Credit columns to indicate the effects of each on the account balance.
67. For each of the accounts listed below, enter the words, Increase or Decrease, in the Debit and Credit columns to indicate the effects of each on the account balance.
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Chapter 05 - Adjustments and the Worksheet
68. Read each of the following transactions for Patel's Repair Services. Determine the accounts to be debited and credited in the necessary end-of-May adjustments. A. On May 1, 2013, Patel's Repair Services, a new firm, paid $6,600 rent in advance for a sixmonth period. The $6,600 was debited to the Prepaid Rent account. B. On May 1, 2013, the firm bought supplies for $2,000. The $2,000 was debited to the Supplies account. An inventory of supplies at the end of May showed that supplies costing $800 were on hand. C. On May 1, 2013, the firm bought equipment costing $10,000. The equipment has an expected useful life of 10 years and no salvage value. The firm will use the straight-line method of depreciation.
69. Read each of the following transactions for Pickerton Printer Repair Services. Determine the accounts to be debited and credited in the necessary end-of-April adjustments. A. On April 1, 2013, Pickerton Printer Repair Services, a new firm, bought supplies for $2,500. The $2,500 was debited to the Supplies account. An inventory of supplies at the end of June showed that supplies costing $1,500 were on hand. B. On April 1, 2013, the firm bought equipment costing $20,000. The equipment has an expected useful life of 10 years and no salvage value. The firm will use the straight-line method of depreciation. C. On April 1, 2013, the firm paid $7,200 rent in advance for a six-month period. The $7,200 was debited to the Prepaid Rent account.
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Chapter 05 - Adjustments and the Worksheet
70. Read each of the following transactions for Gallagher Enterprises. Determine the accounts and amounts to be debited and credited in the necessary end-of-January adjustments. A. On January 1, 2013, Gallagher Enterprises, a new firm, paid $6,000 rent in advance for a three-month period. The $6,000 was debited to the Prepaid Rent account. B. On January 1, 2013, the firm bought supplies for $3,000. The $3,000 was debited to the Supplies account. An inventory of supplies at the end of June showed that supplies costing $1,000 were on hand. C. On January 1, 2013, the firm bought equipment costing $12,000. The equipment has an expected useful life of 10 years and no salvage value. The firm will use the straight-line method of depreciation.
71. Read each of the following transactions for Enterprises Security Systems. Determine the accounts and amounts to be debited and credited in the necessary end-of-July adjustments. A. On July 1, 2013, Enterprises Security Systems, a new firm, bought supplies for $2,300. The $2,300 was debited to the Supplies account. An inventory of supplies at the end of June showed that supplies costing $900 were on hand. B. On July 1, 2013, the firm bought equipment costing $24,000. The equipment has an expected useful life of 10 years and no salvage value. The firm will use the straight-line method of depreciation. C. On July 1, 2013, the firm paid $4,500 rent in advance for a nine-month period. The $4,500 was debited to the Prepaid Rent account.
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Chapter 05 - Adjustments and the Worksheet
72. Read the description of following adjustments that are required at the end of the accounting period for Riley Furniture Restoration. Determine the account and amount to be debited and the account and amount to be credited. A. Purchased supplies for $1,000 on June 1, 2013. Inventory of supplies was $300 on June 30, 2013. Record the adjustment for the amount of the supplies that were used during the month of June 2013. B. Signed a 4-month contract for $1,200 of prepaid advertising on June 1, 2013. Record the adjustment for the amount of the advertising contract that expired during the month of June 2013. C. Prepaid rent for the year on June 1, 2013. Rent expired during the month of June 2013, $700. Record the adjustment on June 30, 2013. D. Depreciation is computed using the straight-line method. Equipment purchased on June 1, 2013, for $16,800 has an estimated useful life of 5 years with no salvage value. Record the adjustment on June 30, 2013.
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Chapter 05 - Adjustments and the Worksheet
73. Read the description of following adjustments that are required at the end of the accounting period for Hubbard Repair Services. Determine the account and amount to be debited and the account and amount to be credited. A. Purchased supplies for $2,000 on November 1, 2013. Inventory of supplies was $600 on November 30, 2013. Record the adjustment for the amount of the supplies that were used during the month of November 2013. B. Signed a 4-month contract for $2,400 of prepaid advertising on November 1, 2013. Record the adjustment for the amount of the advertising contract that expired during the month of November 2013. C. Prepaid rent for the year on November 1, 2013. Rent expired during the month of November 2013, $1,500. Record the adjustment on November 30, 2013. D. Depreciation is computed using the straight-line method. Equipment purchased on November 1, 2013, for $6,000 has an estimated useful life of 5 years with no salvage value. Record the adjustment on November 30, 2013.
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Chapter 05 - Adjustments and the Worksheet
74. Read the description of following adjustments that are required at the end of the accounting period for Hubbard Repair Services. Determine the account and amount to be debited and the account and amount to be credited. A. Prepaid rent for the year on April 1, 2013. Rent expired during the month of April 2013, $3,500. Record the adjustment on April 30, 2013. B. Purchased supplies for $2,000 on April 1, 2013. Inventory of supplies was $1,600 on April 30, 2013. Record the adjustment for the amount of the supplies that were used during the month of April 2013. C. Depreciation is computed using the straight-line method. Equipment purchased on April 1, 2013, for $18,000 has an estimated useful life of 5 years with no salvage value. Record the adjustment on April 30, 2013. D. Signed a 6-month contract for $2,400 of prepaid advertising on April 1, 2013. Record the adjustment for the amount of the contract that expired during the month of April 2013.
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Chapter 05 - Adjustments and the Worksheet
75. Read the description of following adjustments that are required at the end of the accounting period for Drake Consulting Services. Determine the account and amount to be debited and the account and amount to be credited. A. Prepaid rent for the year on January 1, 2013. Rent expired during the month of January 2013, $7,000. Record the adjustment on January 31, 2013. B. Purchased supplies for $1,600 on January 1, 2013. Inventory of supplies was $600 on January 30, 2013. Record the adjustment for the amount of the supplies that were used during the month of January 2013. C. Depreciation is computed using the straight-line method. Equipment purchased on January 1, 2013, for $36,000 has an estimated useful life of 5 years with no salvage value. Record the adjustment on January 31, 2013. D. Signed a 12-month contract for $2,400 of prepaid advertising on January 1, 2013. Record the adjustment for the amount of the advertising contract that expired during the month of January 2013.
76. Read the description of following adjustments that are required at the end of the accounting period for AAA Appliance Repair Services. Record the necessary adjusting entries on page 2 of a general journal. Omit the descriptions. A. Prepaid rent for the year on January 1, 2013. Rent expired during the month of January 2013, $2,000. B. Purchased supplies for $7,600 on January 1, 2013. Inventory of supplies was $1,600 on January 30, 2013. C. Depreciation is computed using the straight-line method. Equipment purchased on January 1, 2013, for $15,000 has an estimated useful life of 5 years with no salvage value. D. Signed a 3-month contract for $600 of prepaid advertising on January 1, 2013.
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Chapter 05 - Adjustments and the Worksheet
77. Read the description of following adjustments that are required at the end of the accounting period for Anise's Repair Services. Record the necessary adjusting entries on page 2 of a general journal. Omit the descriptions. A. Prepaid rent for the year on January 1, 2013. Rent expired during the month of January 2013, $1,600. B. Purchased supplies for $4,000 on January 1, 2013. Inventory of supplies was $1,200 on January 30, 2013. C. Depreciation is computed using the straight-line method. Equipment purchased on January 1, 2013, for $3,000 has an estimated useful life of 5 years with no salvage value. D. Signed a 3-month contract for $450 of prepaid advertising on January 1, 2013.
78. Read the description of following adjustments that are required at the end of the accounting period for Paulo Consulting Services. Record the necessary adjusting entries on page 2 of a general journal. Omit the descriptions. A. Equipment purchased on January 1, 2013, for $24,000 has an estimated useful life of 5 years with no salvage value. Depreciation is computed using the straight-line method. B. Signed a 3-month contract for $4,500 of prepaid advertising on January 1, 2013. C. Prepaid rent for the year on January 1, 2013. Rent expired during the month of January 2013, $1,600. D. Purchased supplies for $2,000 on January 1, 2013. Inventory of supplies was $1,200 on January 31, 2013.
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Chapter 05 - Adjustments and the Worksheet
79. Read the description of following adjustments that are required at the end of the accounting period for River Front Repair. Record the necessary adjusting entries on page 2 of a general journal. Omit the descriptions. A. Prepaid rent for the year on January 1, 2013. Rent expired during the month of January, $7,200. B. Equipment purchased on January 1, 2013, for $8,100 has an estimated useful life of 5 years with no salvage value. Depreciation is computed using the straight-line method. C. Purchased supplies for $650 on January 1, 2013. Inventory of supplies was $100 on January 31, 2013. D. Signed a 12-month contract for $4,800 of prepaid advertising on January 1, 2013.
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Chapter 05 - Adjustments and the Worksheet
80. The balances of the ledger accounts for Oleman Services on January 31, 2013, and the information needed for adjustments are shown below. Prepare the Trial Balance section, record the adjustments, and complete the worksheet.
Adjustment information: (a) The supplies were purchased on January 1, 2013. An inventory of supplies showed $600 on hand on January 31, 2013. (b) The amount of Prepaid Insurance represents a payment made January 1, 2013, for a sixmonth insurance policy. (c) The equipment, purchased January 1, 2013, has an estimated useful life of 5 years with no salvage value. The firm uses the straight-line method of depreciation.
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
81. The balances of the ledger accounts for Buffet Services on September 30, 2013, and the information needed for adjustments are shown below. Prepare the Trial Balance section, record the adjustments, and complete the worksheet.
Adjustment information: (a) The supplies were purchased on September 1, 2013. An inventory of supplies showed $1,200 on hand on September 30, 2013. (b) The amount of Prepaid Insurance represents a payment made September 1, 2013, for a sixmonth insurance policy. (c) The equipment, purchased September 1, 2013, has an estimated useful life of 5 years with no salvage value. The firm uses the straight-line method of depreciation.
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
82. The balances of the ledger accounts for Lance's Landscaping Design on March 31, 2013, and the information needed for adjustments are shown below. Prepare the Trial Balance section, record the adjustments, and complete the worksheet.
Adjustment information: (a) The supplies were purchased on March 1, 2013. An inventory of supplies showed $300 on hand on March 31, 2013. (b) The amount of Prepaid Insurance represents a payment made March 1, 2013, for a sixmonth insurance policy. (c) The equipment, purchased March 1, 2013, has an estimated useful life of 5 years with no salvage value. The firm uses the straight-line method of depreciation.
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
83. The partial worksheet for the Lorado Insurance Agency for the month ended October 31, 2013, is shown below. Using this data, prepare an income statement, a statement of owner's equity, and a balance sheet. The owner made no additional investments during the month.
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Chapter 05 - Adjustments and the Worksheet
84. The partial worksheet for the Marion Consulting Services for the month ended January 31, 2013, is shown below. Using this data, prepare an income statement, a statement of owner's equity, and a balance sheet. The owner made no additional investments during the month.
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Chapter 05 - Adjustments and the Worksheet
Matching Questions
85. Match the accounting terms with the description by entering the proper number. 1. A balance sheet that lists assets on the left and liabilities and owner's equity on the right 2. Journal entries made to update accounts for items that were used or expired during the accounting period 3. An asset account with a credit balance, which is contrary to the normal balance of an asset account 4. An estimate of the amount that could be received by selling or disposing of an asset at the end of its useful life 5. That portion of an asset's original cost that has not yet been depreciated 6. Expense items acquired, recorded, and paid for in advance of their use 7. A form used to gather all data needed at the end of an accounting period to prepare financial statements 8. Allocation of an asset's cost in equal amounts to each accounting period of the asset's useful life 9. A balance sheet that lists the asset accounts first, followed by liabilities and owner's equity 10. An account with a normal balance that is opposite that of a related account 11. Allocation of the cost of a long-term asset to operations during its expected useful life
Straight-line depreciation ____ Adjusting entries or adjustments ____ Salvage value ____ Account form balance sheet ____ Contra account ____ Worksheet ____
Book value ____ Prepaid expenses ____ Contra asset account ____ Report form balance sheet ____ Depreciation ____
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Chapter 05 - Adjustments and the Worksheet
Chapter 05 Adjustments and the Worksheet Answer Key
True / False Questions
1. All changes in account balances are caused by transactions between the business and another business or individual. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
2. Prepaid expenses, such as prepaid rent and prepaid insurance, represent assets for a business until they are used. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Easy Topic: The Worksheet
3. The cost of a long-term asset, such as equipment, is transferred to expense as it is used during its life. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Easy Topic: The Worksheet
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Chapter 05 - Adjustments and the Worksheet
4. If an adjustment is not recorded for supplies used, the firm's assets will be overstated. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
5. If an adjustment for expired rent is not recorded, the firm's expenses will be overstated. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
6. The normal balance of a contra asset account is a debit. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
7. Letters are used to label the debit and credit parts of an adjustment on the worksheet. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Easy Topic: The Worksheet
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Chapter 05 - Adjustments and the Worksheet
8. Land is a long-term asset that is not subject to depreciation. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Easy Topic: The Worksheet
9. The balances of the revenue accounts are recorded in the Trial Balance Credit column, the Adjusted Trial Balance Credit column, and the Balance Sheet Credit column of the worksheet. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-03 Complete the worksheet. Level: Easy Topic: Financial Statements
10. Preparation of a worksheet eliminates the necessity of preparing an income statement and a balance sheet. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-03 Complete the worksheet. Level: Easy Topic: Financial Statements
11. In the Adjusted Trial Balance section of the worksheet the total debits should equal the total credits. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-03 Complete the worksheet. Level: Easy Topic: Financial Statements
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Chapter 05 - Adjustments and the Worksheet
12. The balance of the owner's drawing account is extended to the Income Statement Debit column of the worksheet. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-03 Complete the worksheet. Level: Medium Topic: Financial Statements
13. The balance of a liability account is extended to the Balance Sheet Credit column of the worksheet. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-03 Complete the worksheet. Level: Easy Topic: Financial Statements
14. The statement of owner's equity is prepared from the data in the Income Statement section of the worksheet. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-04 Prepare an income statement; statement of owner's equity; and balance sheet from the completed worksheet. Level: Medium Topic: Financial Statements
15. If adjustments are entered on a worksheet, it is not necessary to record them in the journal or the ledger. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-05 Journalize and post the adjusting entries. Level: Easy Topic: Financial Statements
5-37 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
Fill in the Blank Questions
16. A(n) ____________________ is a comparison of the general ledger accounts with debit balances to the general ledger accounts with credit balances to make sure that the debit and credit totals are equal. trial balance
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-01 Complete a trial balance on a worksheet. Level: Medium Topic: The Worksheet
17. The process of allocating the cost of a long-term asset as an expense of operations during the asset's expected useful life is known as ____________________. depreciation
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Learning Objective: 05-06 Define the accounting terms new to this chapter. Level: Easy Topic: Financial Statements Topic: The Worksheet
18. The difference between the debit balance of the Equipment account and the credit balance of the Accumulated Depreciation—Equipment account is called the ____________________ of an asset. book value
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
5-38 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
19. The Supplies account had a balance of $1,200 when a physical count indicated that supplies on hand totaled $400. This means that supplies in the amount of ____________________ were used during the accounting period. $800
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Easy Topic: The Worksheet
20. The process of updating accounts at the end of an accounting period for previously unrecorded items that belong to the period is referred to as making ____________________. adjustments; adjusting entries
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Learning Objective: 05-06 Define the accounting terms new to this chapter. Level: Easy Topic: Financial Statements Topic: The Worksheet
21. The account credited in the adjusting entry made to record the expiration of a portion of prepaid rent is the ____________________ account. Prepaid Rent
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
5-39 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
22. An accumulated depreciation account is often referred to as a(n) ____________________ asset account. contra
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Easy Topic: The Worksheet
23. Expense items that are acquired and paid for in advance of their use are called ____________________ expenses. prepaid
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Learning Objective: 05-06 Define the accounting terms new to this chapter. Level: Easy Topic: Financial Statements Topic: The Worksheet
24. If equipment has ____________________ value, it can be sold for additional use or for scrap. salvage
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
5-40 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
25. When the ____________________ method of depreciation is used, an equal amount of depreciation is charged to each accounting period during the asset's useful life. straight-line
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Easy Topic: The Worksheet
26. An accumulated depreciation account has a normal ____________________ balance. credit
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Easy Topic: The Worksheet
27. A(n) ____________________ is prepared at the end of each accounting period to organize and summarize the data needed for the preparation of the financial statements. worksheet
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-03 Complete the worksheet. Level: Easy Topic: Financial Statements
28. On a worksheet, the adjusted balance of Supplies is extended from the Adjusted Trial Balance Debit column to the ____________________ Debit column. Balance Sheet
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-03 Complete the worksheet. Level: Easy Topic: Financial Statements
5-41 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
29. On a worksheet, the adjusted balance of Depreciation Expense is extended from the Adjusted Trial Balance Debit column to the ____________________ Debit column. Income Statement
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-03 Complete the worksheet. Level: Easy Topic: Financial Statements
30. When the liabilities and owner's equity section is listed under the assets section, the firm is using the ____________________ form balance sheet. report
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-04 Prepare an income statement; statement of owner's equity; and balance sheet from the completed worksheet. Level: Easy Topic: Financial Statements
Multiple Choice Questions
31. Which of the following need not be completed separately if a worksheet is prepared? A. a trial balance B. an income statement C. a balance sheet D. a statement of owner's equity
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-01 Complete a trial balance on a worksheet. Level: Easy Topic: The Worksheet
5-42 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
32. When a trial balance is in balance, A. adjusting entries are not required. B. the general ledger is free of errors. C. the debit account balances equal the credit account balances. D. the company has earned a net income.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-01 Complete a trial balance on a worksheet. Level: Medium Topic: The Worksheet
33. A total of $3,200 in supplies was purchased during the year. At the end of the year $700 of the supplies were left. The adjusting entry needed at the end of the year is: A. debit Supplies $2,500; credit Supplies Expense $2,500 B. debit Supplies Expense $3,200; credit Supplies $3,200 C. debit Supplies Expense $700; credit Supplies $700 D. debit Supplies Expense $2,500; credit Supplies $2,500
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-01 Complete a trial balance on a worksheet. Level: Easy Topic: The Worksheet
34. MacGyver Company bought equipment on January 3, 2013, for $34,000. At the time of purchase, the equipment was estimated to have a useful life of six years and a salvage value of $880. Using the straight-line method, the amount of one year's depreciation is A. $880 B. $5,520 C. $460 D. $5,667
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-01 Complete a trial balance on a worksheet. Level: Easy Topic: The Worksheet
5-43 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
35. Adjusting Entries are A. corrections of errors. B. needed for expenses that were paid for before or after they were used. C. not required. D. will always affect cash.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-01 Complete a trial balance on a worksheet. Level: Easy Topic: The Worksheet
36. Equipment costing $13,500 with an estimated salvage value of $1,020 and an estimated life of 4 years was purchased on November 1, 2013. Using the straight-line depreciation method, what is the amount of depreciation expense to be recorded at December 31, 2013? A. $260 B. $520 C. $3,120 D. $1,020
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-01 Complete a trial balance on a worksheet. Level: Easy Topic: The Worksheet
37. Which of the following entries records the depreciation on equipment for the fiscal yearend adjustment? A. Debit Accumulated Depreciation; credit Depreciation Expense B. Debit Depreciation Expense; credit Equipment C. Debit Depreciation Expense; credit Accumulated Depreciation D. Debit Depreciation; credit Depreciation Expense
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-01 Complete a trial balance on a worksheet. Level: Easy Topic: The Worksheet
5-44 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
38. On October 1, 2013, Jay Walker Company purchased a one-year insurance policy for $660. The correct adjusting entry on December 31, 2013, is A. debit Insurance Expense $660; credit Prepaid Insurance $660 B. debit Insurance Expense $495; credit Prepaid Insurance $495 C. debit Prepaid Insurance $55; credit Insurance Expense $55 D. debit Insurance Expense $165; credit Prepaid Insurance $165
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-01 Complete a trial balance on a worksheet. Level: Easy Topic: The Worksheet
39. Equipment cost $36,000 and is expected to be useful for 5 years and have no salvage value. Under the straight-line method, monthly depreciation will be A. $600. B. $720. C. $60. D. $12.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
40. On a worksheet, the adjusting entry to account for depreciation of equipment consists of A. a debit to Depreciation Expense and a credit to Equipment. B. a debit to Depreciation Expense and a credit to Accumulated Depreciation. C. a debit to Equipment and a credit to Accumulated Depreciation. D. a debit to Accumulated Depreciation and a credit to Equipment.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
5-45 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
41. If the prepaid expenses are not adjusted, assets on the balance sheet A. will be overstated. B. will be understated. C. will not be affected. D. may be either overstated or understated.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Hard Topic: The Worksheet
42. If long-term assets are not adjusted, expenses on the income statement A. will be overstated. B. will be understated. C. will not be affected. D. may be either overstated or understated.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Hard Topic: The Worksheet
43. On November 25, 2013, the company paid $24,000 rent in advance for a six-month period (December 2013 through May 2014). On December 31, 2013, the adjustment for expired rent would include A. a $4,000 debit to Prepaid Rent. B. a $4,000 credit to Rent Expense. C. a $24,000 debit to Rent Expense. D. a $4,000 credit to Prepaid Rent.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
5-46 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
44. The adjusting entry to account for the use of supplies consists of A. a debit to Supplies Expense and a credit to Supplies. B. a debit to Supplies and a credit to Supplies Expense. C. a debit to Supplies and a credit to Accumulated Depreciation. D. a debit to Accumulated Depreciation and a credit to Supplies.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Easy Topic: The Worksheet
45. The adjusting entry to account for the expiration of prepaid insurance consists of A. a debit to Insurance Expense and a credit to Prepaid Insurance. B. a debit to Insurance Expense and a credit to Accumulated Depreciation. C. a debit to Prepaid Insurance and a credit to Accumulated Depreciation. D. a debit to Accumulated Depreciation and a credit to Prepaid Insurance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
46. The adjusting entry to account for the expiration of prepaid advertising consists of A. a debit to Prepaid Advertising and a credit to Advertising Expense. B. a debit to Advertising Expense and a credit to Accumulated Depreciation. C. a debit to Prepaid Advertising and a credit to Accumulated Depreciation. D. a debit to Advertising Expense and a credit to Prepaid Advertising.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Easy Topic: The Worksheet
5-47 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
47. Which of the following statements is not correct? A. Generally accepted accounting principles require that the original cost of a long-term asset continue to appear in the asset account until the disposition of the asset. B. The book value of a long-term asset is reduced each year as depreciation is recorded. C. Buildings and trucks are examples of long-term assets. D. Salvage value is computed by subtracting the accumulated depreciation from the cost of a long-term asset.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
48. On a worksheet, the adjusted balance of the Accumulated Depreciation account is extended to: A. the Income Statement Debit column. B. the Income Statement Credit column. C. the Balance Sheet Debit column. D. the Balance Sheet Credit column.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 05-03 Complete the worksheet. Level: Medium Topic: Financial Statements
49. On a worksheet, the adjusted balance of the Depreciation Expense account is extended to: A. the Income Statement Debit column. B. the Income Statement Credit column. C. the Balance Sheet Debit column. D. the Balance Sheet Credit column.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-03 Complete the worksheet. Level: Easy Topic: Financial Statements
5-48 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
50. On a worksheet, the adjusted balance of the Supplies account is extended to: A. the Income Statement Debit column. B. the Income Statement Credit column. C. the Balance Sheet Debit column. D. the Balance Sheet Credit column.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-03 Complete the worksheet. Level: Easy Topic: Financial Statements
51. On a worksheet, the adjusted balance of the Supplies Expense account is extended to: A. the Income Statement Debit column. B. the Income Statement Credit column. C. the Balance Sheet Debit column. D. the Balance Sheet Credit column.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-03 Complete the worksheet. Level: Easy Topic: Financial Statements
52. Which of the following statements is correct? A. The cost of supplies used is reported on the statement of owner's equity. B. The cost of supplies used represents an operating expense of the business. C. Accumulated Depreciation--Equipment is presented in the Liabilities section of a balance sheet. D. At the time of their acquisition, prepaid expenses are recorded in expense accounts.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Learning Objective: 05-04 Prepare an income statement; statement of owner's equity; and balance sheet from the completed worksheet. Level: Medium Topic: Financial Statements Topic: The Worksheet
5-49 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
53. On a worksheet, the adjusted balance of the Prepaid Rent account is extended to the: A. Income Statement Debit column. B. Income Statement Credit column. C. Balance Sheet Debit column. D. Balance Sheet Credit column.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-03 Complete the worksheet. Level: Easy Topic: Financial Statements
54. On a worksheet, the adjusted balance of the revenue account Fees Income would be extended to: A. the Income Statement Debit column. B. the Balance Sheet Credit column. C. the Balance Sheet Debit column. D. the Income Statement Credit column.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-03 Complete the worksheet. Level: Easy Topic: Financial Statements
55. On the worksheet, the Balance Sheet columns should balance A. before the net income amount is added to the Balance Sheet Debit column. B. after the net income amount is added to the Balance Sheet Debit column. C. after the net income amount is added to the Balance Sheet Credit column. D. before the net income amount is added to the Balance Sheet Credit column.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 05-03 Complete the worksheet. Level: Medium Topic: Financial Statements
5-50 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
56. On a worksheet, the adjusted balance of a contra asset account would be extended to A. the Balance Sheet Debit column. B. the Balance Sheet Credit column. C. the Income Statement Debit column. D. the Income Statement Credit column.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-03 Complete the worksheet. Level: Medium Topic: Financial Statements
57. On a worksheet, a net loss is A. recorded in the Income Statement Debit column. B. recorded in the Balance Sheet Debit column. C. recorded in the Balance Sheet Credit column. D. not recorded.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 05-03 Complete the worksheet. Level: Medium Topic: Financial Statements
58. If a worksheet is prepared at the end of the accounting year, A. preparation of the financial statements is not required. B. the adjusting entries do not need to be journalized. C. only a balance sheet is required. D. the financial statements are prepared using the worksheet data.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-03 Complete the worksheet. Level: Easy Topic: Financial Statements
5-51 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
59. Which of the following statements is not correct? A. The difference between the total of the Income Statement Debit column and the total of the Income Statement Credit column of the worksheet represents either net income or net loss. B. Net income is recorded on the worksheet in the Income Statement Debit column and the Balance Sheet Credit column. C. Only the balances of accounts that are affected by adjustments must be recalculated before they are recorded in the Adjusted Trial Balance section of the worksheet. D. If an account has a debit balance in the Trial Balance section of the worksheet and there is a credit entry in the Adjustments section, the credit amount is added when computing the balance to be shown in the Adjusted Trial Balance section of the worksheet.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 05-03 Complete the worksheet. Level: Medium Topic: Financial Statements
60. On a balance sheet, Accumulated Depreciation—Equipment is reported A. as a deduction from the cost of the equipment. B. as a liability. C. as an expense. D. as a deduction from the total of the assets.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-04 Prepare an income statement; statement of owner's equity; and balance sheet from the completed worksheet. Level: Medium Topic: Financial Statements
61. The book value of long-term assets is reported on A. the income statement. B. the statement of owner's equity. C. the balance sheet. D. the worksheet.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-04 Prepare an income statement; statement of owner's equity; and balance sheet from the completed worksheet. Level: Medium Topic: Financial Statements
5-52 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
62. The balance in the account Accumulated Depreciation, Equipment will A. be reported on the Income Statement. B. be reported on the Statement of Owner's Equity. C. will be reported on the Balance Sheet. D. not appear on any financial statement.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-04 Prepare an income statement; statement of owner's equity; and balance sheet from the completed worksheet. Level: Easy Topic: Financial Statements
63. A consecutive, twelve-month accounting period is called a(n) A. accrual year B. fiscal year C. accounting year D. adjusted year
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-04 Prepare an income statement; statement of owner's equity; and balance sheet from the completed worksheet. Level: Easy Topic: Financial Statements
64. Accumulated Depreciation, Equipment, is shown as: A. a liability on the Balance Sheet B. a reduction of Capital on the Statement of Owner's Equity C. a contra asset on the Balance Sheet D. an expense on the Income Statement
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-04 Prepare an income statement; statement of owner's equity; and balance sheet from the completed worksheet. Level: Easy Topic: Financial Statements
5-53 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
65. The adjustments made on the worksheet A. are posted to the ledger but are not recorded in the journal. B. are recorded in the journal but are not posted to the ledger. C. need not be entered in the journal or the ledger. D. are recorded in the journal and then posted to the general ledger accounts.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-05 Journalize and post the adjusting entries. Level: Medium Topic: Financial Statements
5-54 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
Short Answer Questions
66. For each of the accounts listed below, enter the words, Increase or Decrease, in the Debit and Credit columns to indicate the effects of each on the account balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Easy Topic: The Worksheet
5-55 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
67. For each of the accounts listed below, enter the words, Increase or Decrease, in the Debit and Credit columns to indicate the effects of each on the account balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Easy Topic: The Worksheet
5-56 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
68. Read each of the following transactions for Patel's Repair Services. Determine the accounts to be debited and credited in the necessary end-of-May adjustments. A. On May 1, 2013, Patel's Repair Services, a new firm, paid $6,600 rent in advance for a sixmonth period. The $6,600 was debited to the Prepaid Rent account. B. On May 1, 2013, the firm bought supplies for $2,000. The $2,000 was debited to the Supplies account. An inventory of supplies at the end of May showed that supplies costing $800 were on hand. C. On May 1, 2013, the firm bought equipment costing $10,000. The equipment has an expected useful life of 10 years and no salvage value. The firm will use the straight-line method of depreciation. A. Rent Expense (dr.); Prepaid Rent (cr.) B. Supplies Expense (dr.); Supplies (cr.) C. Depreciation Expense (dr.); Accumulated Depreciation (cr.)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
5-57 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
69. Read each of the following transactions for Pickerton Printer Repair Services. Determine the accounts to be debited and credited in the necessary end-of-April adjustments. A. On April 1, 2013, Pickerton Printer Repair Services, a new firm, bought supplies for $2,500. The $2,500 was debited to the Supplies account. An inventory of supplies at the end of June showed that supplies costing $1,500 were on hand. B. On April 1, 2013, the firm bought equipment costing $20,000. The equipment has an expected useful life of 10 years and no salvage value. The firm will use the straight-line method of depreciation. C. On April 1, 2013, the firm paid $7,200 rent in advance for a six-month period. The $7,200 was debited to the Prepaid Rent account. A. Supplies Expense (dr.); Supplies (cr.) B. Depreciation Expense (dr.); Accumulated Depreciation (cr.) C. Rent Expense (dr.); Prepaid Rent (cr.)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
5-58 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
70. Read each of the following transactions for Gallagher Enterprises. Determine the accounts and amounts to be debited and credited in the necessary end-of-January adjustments. A. On January 1, 2013, Gallagher Enterprises, a new firm, paid $6,000 rent in advance for a three-month period. The $6,000 was debited to the Prepaid Rent account. B. On January 1, 2013, the firm bought supplies for $3,000. The $3,000 was debited to the Supplies account. An inventory of supplies at the end of June showed that supplies costing $1,000 were on hand. C. On January 1, 2013, the firm bought equipment costing $12,000. The equipment has an expected useful life of 10 years and no salvage value. The firm will use the straight-line method of depreciation. A. Rent Expense (dr.) $2,000; Prepaid Rent (cr.) $2,000 B. Supplies Expense (dr.) $2,000; Supplies (cr.) $2,000 C. Depreciation Expense (dr.) $100; Accumulated Depreciation (cr.) $100
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
5-59 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 05 - Adjustments and the Worksheet
71. Read each of the following transactions for Enterprises Security Systems. Determine the accounts and amounts to be debited and credited in the necessary end-of-July adjustments. A. On July 1, 2013, Enterprises Security Systems, a new firm, bought supplies for $2,300. The $2,300 was debited to the Supplies account. An inventory of supplies at the end of June showed that supplies costing $900 were on hand. B. On July 1, 2013, the firm bought equipment costing $24,000. The equipment has an expected useful life of 10 years and no salvage value. The firm will use the straight-line method of depreciation. C. On July 1, 2013, the firm paid $4,500 rent in advance for a nine-month period. The $4,500 was debited to the Prepaid Rent account. A. Supplies Expense (dr.) $1,400; Supplies (cr.) $1,400 B. Depreciation Expense (dr.) $200; Accumulated Depreciation (cr.) $200 C. Rent Expense (dr.) $500; Prepaid Rent (cr.) $500
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
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Chapter 05 - Adjustments and the Worksheet
72. Read the description of following adjustments that are required at the end of the accounting period for Riley Furniture Restoration. Determine the account and amount to be debited and the account and amount to be credited. A. Purchased supplies for $1,000 on June 1, 2013. Inventory of supplies was $300 on June 30, 2013. Record the adjustment for the amount of the supplies that were used during the month of June 2013. B. Signed a 4-month contract for $1,200 of prepaid advertising on June 1, 2013. Record the adjustment for the amount of the advertising contract that expired during the month of June 2013. C. Prepaid rent for the year on June 1, 2013. Rent expired during the month of June 2013, $700. Record the adjustment on June 30, 2013. D. Depreciation is computed using the straight-line method. Equipment purchased on June 1, 2013, for $16,800 has an estimated useful life of 5 years with no salvage value. Record the adjustment on June 30, 2013. A. Debit Supplies Expense, $700; credit Supplies, $700 B. Debit Advertising Expense, $300; credit Prepaid Advertising, $300 C. Debit Rent Expense, $700; credit Prepaid Rent, $700 D. Debit Depreciation Expense--Equipment, $280; credit Accumulated Depreciation-Equipment, $280
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
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Chapter 05 - Adjustments and the Worksheet
73. Read the description of following adjustments that are required at the end of the accounting period for Hubbard Repair Services. Determine the account and amount to be debited and the account and amount to be credited. A. Purchased supplies for $2,000 on November 1, 2013. Inventory of supplies was $600 on November 30, 2013. Record the adjustment for the amount of the supplies that were used during the month of November 2013. B. Signed a 4-month contract for $2,400 of prepaid advertising on November 1, 2013. Record the adjustment for the amount of the advertising contract that expired during the month of November 2013. C. Prepaid rent for the year on November 1, 2013. Rent expired during the month of November 2013, $1,500. Record the adjustment on November 30, 2013. D. Depreciation is computed using the straight-line method. Equipment purchased on November 1, 2013, for $6,000 has an estimated useful life of 5 years with no salvage value. Record the adjustment on November 30, 2013. A. Debit Supplies Expense, $1,400; credit Supplies, $1,400 B. Debit Advertising Expense, $600; credit Prepaid Advertising, $600 C. Debit Rent Expense, $1,500; credit Prepaid Rent, $1,500 D. Debit Depreciation Expense--Equipment, $100; credit Accumulated Depreciation-Equipment, $100
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
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Chapter 05 - Adjustments and the Worksheet
74. Read the description of following adjustments that are required at the end of the accounting period for Hubbard Repair Services. Determine the account and amount to be debited and the account and amount to be credited. A. Prepaid rent for the year on April 1, 2013. Rent expired during the month of April 2013, $3,500. Record the adjustment on April 30, 2013. B. Purchased supplies for $2,000 on April 1, 2013. Inventory of supplies was $1,600 on April 30, 2013. Record the adjustment for the amount of the supplies that were used during the month of April 2013. C. Depreciation is computed using the straight-line method. Equipment purchased on April 1, 2013, for $18,000 has an estimated useful life of 5 years with no salvage value. Record the adjustment on April 30, 2013. D. Signed a 6-month contract for $2,400 of prepaid advertising on April 1, 2013. Record the adjustment for the amount of the contract that expired during the month of April 2013. A. Debit Rent Expense, $3,500; credit Prepaid Rent, $3,500 B. Debit Supplies Expense, $400; credit Supplies, $400 C. Debit Depreciation Expense--Equipment, $300; credit Accumulated Depreciation-Equipment, $300 D. Debit Advertising Expense, $400; credit Prepaid Advertising, $400
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
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Chapter 05 - Adjustments and the Worksheet
75. Read the description of following adjustments that are required at the end of the accounting period for Drake Consulting Services. Determine the account and amount to be debited and the account and amount to be credited. A. Prepaid rent for the year on January 1, 2013. Rent expired during the month of January 2013, $7,000. Record the adjustment on January 31, 2013. B. Purchased supplies for $1,600 on January 1, 2013. Inventory of supplies was $600 on January 30, 2013. Record the adjustment for the amount of the supplies that were used during the month of January 2013. C. Depreciation is computed using the straight-line method. Equipment purchased on January 1, 2013, for $36,000 has an estimated useful life of 5 years with no salvage value. Record the adjustment on January 31, 2013. D. Signed a 12-month contract for $2,400 of prepaid advertising on January 1, 2013. Record the adjustment for the amount of the advertising contract that expired during the month of January 2013. A. Debit Rent Expense, $7,000; credit Prepaid Rent, $7,000 B. Debit Supplies Expense, $1,000; credit Supplies, $1,000 C. Debit Depreciation Expense--Equipment, $600; credit Accumulated Depreciation-Equipment, $600 D. Debit Advertising Expense, $200; credit Prepaid Advertising, $200
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
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Chapter 05 - Adjustments and the Worksheet
76. Read the description of following adjustments that are required at the end of the accounting period for AAA Appliance Repair Services. Record the necessary adjusting entries on page 2 of a general journal. Omit the descriptions. A. Prepaid rent for the year on January 1, 2013. Rent expired during the month of January 2013, $2,000. B. Purchased supplies for $7,600 on January 1, 2013. Inventory of supplies was $1,600 on January 30, 2013. C. Depreciation is computed using the straight-line method. Equipment purchased on January 1, 2013, for $15,000 has an estimated useful life of 5 years with no salvage value. D. Signed a 3-month contract for $600 of prepaid advertising on January 1, 2013.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
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Chapter 05 - Adjustments and the Worksheet
77. Read the description of following adjustments that are required at the end of the accounting period for Anise's Repair Services. Record the necessary adjusting entries on page 2 of a general journal. Omit the descriptions. A. Prepaid rent for the year on January 1, 2013. Rent expired during the month of January 2013, $1,600. B. Purchased supplies for $4,000 on January 1, 2013. Inventory of supplies was $1,200 on January 30, 2013. C. Depreciation is computed using the straight-line method. Equipment purchased on January 1, 2013, for $3,000 has an estimated useful life of 5 years with no salvage value. D. Signed a 3-month contract for $450 of prepaid advertising on January 1, 2013.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
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Chapter 05 - Adjustments and the Worksheet
78. Read the description of following adjustments that are required at the end of the accounting period for Paulo Consulting Services. Record the necessary adjusting entries on page 2 of a general journal. Omit the descriptions. A. Equipment purchased on January 1, 2013, for $24,000 has an estimated useful life of 5 years with no salvage value. Depreciation is computed using the straight-line method. B. Signed a 3-month contract for $4,500 of prepaid advertising on January 1, 2013. C. Prepaid rent for the year on January 1, 2013. Rent expired during the month of January 2013, $1,600. D. Purchased supplies for $2,000 on January 1, 2013. Inventory of supplies was $1,200 on January 31, 2013.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
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Chapter 05 - Adjustments and the Worksheet
79. Read the description of following adjustments that are required at the end of the accounting period for River Front Repair. Record the necessary adjusting entries on page 2 of a general journal. Omit the descriptions. A. Prepaid rent for the year on January 1, 2013. Rent expired during the month of January, $7,200. B. Equipment purchased on January 1, 2013, for $8,100 has an estimated useful life of 5 years with no salvage value. Depreciation is computed using the straight-line method. C. Purchased supplies for $650 on January 1, 2013. Inventory of supplies was $100 on January 31, 2013. D. Signed a 12-month contract for $4,800 of prepaid advertising on January 1, 2013.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Level: Medium Topic: The Worksheet
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Chapter 05 - Adjustments and the Worksheet
80. The balances of the ledger accounts for Oleman Services on January 31, 2013, and the information needed for adjustments are shown below. Prepare the Trial Balance section, record the adjustments, and complete the worksheet.
Adjustment information: (a) The supplies were purchased on January 1, 2013. An inventory of supplies showed $600 on hand on January 31, 2013. (b) The amount of Prepaid Insurance represents a payment made January 1, 2013, for a sixmonth insurance policy. (c) The equipment, purchased January 1, 2013, has an estimated useful life of 5 years with no salvage value. The firm uses the straight-line method of depreciation.
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 05-01 Complete a trial balance on a worksheet. Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Learning Objective: 05-03 Complete the worksheet. Level: Hard Topic: Financial Statements Topic: The Worksheet
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Chapter 05 - Adjustments and the Worksheet
81. The balances of the ledger accounts for Buffet Services on September 30, 2013, and the information needed for adjustments are shown below. Prepare the Trial Balance section, record the adjustments, and complete the worksheet.
Adjustment information: (a) The supplies were purchased on September 1, 2013. An inventory of supplies showed $1,200 on hand on September 30, 2013. (b) The amount of Prepaid Insurance represents a payment made September 1, 2013, for a sixmonth insurance policy. (c) The equipment, purchased September 1, 2013, has an estimated useful life of 5 years with no salvage value. The firm uses the straight-line method of depreciation.
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 05-01 Complete a trial balance on a worksheet. Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Learning Objective: 05-03 Complete the worksheet. Level: Hard Topic: Financial Statements Topic: The Worksheet
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Chapter 05 - Adjustments and the Worksheet
82. The balances of the ledger accounts for Lance's Landscaping Design on March 31, 2013, and the information needed for adjustments are shown below. Prepare the Trial Balance section, record the adjustments, and complete the worksheet.
Adjustment information: (a) The supplies were purchased on March 1, 2013. An inventory of supplies showed $300 on hand on March 31, 2013. (b) The amount of Prepaid Insurance represents a payment made March 1, 2013, for a sixmonth insurance policy. (c) The equipment, purchased March 1, 2013, has an estimated useful life of 5 years with no salvage value. The firm uses the straight-line method of depreciation.
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-01 Complete a trial balance on a worksheet. Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Learning Objective: 05-03 Complete the worksheet. Level: Hard Topic: Financial Statements Topic: The Worksheet
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Chapter 05 - Adjustments and the Worksheet
83. The partial worksheet for the Lorado Insurance Agency for the month ended October 31, 2013, is shown below. Using this data, prepare an income statement, a statement of owner's equity, and a balance sheet. The owner made no additional investments during the month.
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 05-04 Prepare an income statement; statement of owner's equity; and balance sheet from the completed worksheet. Level: Medium Topic: Financial Statements
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Chapter 05 - Adjustments and the Worksheet
84. The partial worksheet for the Marion Consulting Services for the month ended January 31, 2013, is shown below. Using this data, prepare an income statement, a statement of owner's equity, and a balance sheet. The owner made no additional investments during the month.
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Chapter 05 - Adjustments and the Worksheet
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Chapter 05 - Adjustments and the Worksheet
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 05-04 Prepare an income statement; statement of owner's equity; and balance sheet from the completed worksheet. Level: Medium Topic: The Worksheet
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Chapter 05 - Adjustments and the Worksheet
Matching Questions
85. Match the accounting terms with the description by entering the proper number. 1. A balance sheet that lists assets on the left and liabilities and owner's equity on the right 2. Journal entries made to update accounts for items that were used or expired during the accounting period 3. An asset account with a credit balance, which is contrary to the normal balance of an asset account 4. An estimate of the amount that could be received by selling or disposing of an asset at the end of its useful life 5. That portion of an asset's original cost that has not yet been depreciated 6. Expense items acquired, recorded, and paid for in advance of their use 7. A form used to gather all data needed at the end of an accounting period to prepare financial statements 8. Allocation of an asset's cost in equal amounts to each accounting period of the asset's useful life 9. A balance sheet that lists the asset accounts first, followed by liabilities and owner's equity 10. An account with a normal balance that is opposite that of a related account 11. Allocation of the cost of a long-term asset to operations during its expected useful life
Straight-line depreciation 8 Adjusting entries or adjustments 2 Salvage value 4 Account form balance sheet 1 Contra account 10 Worksheet 7 Book value 5 Prepaid expenses 6 Contra asset account 3 Report form balance sheet 9 Depreciation 11
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 05-01 Complete a trial balance on a worksheet. Learning Objective: 05-02 Prepare adjustments for unrecorded business transactions. Learning Objective: 05-03 Complete the worksheet. Learning Objective: 05-04 Prepare an income statement; statement of owner's equity; and balance sheet from the completed worksheet. Learning Objective: 05-06 Define the accounting terms new to this chapter. Level: Medium Topic: Financial Statements Topic: The Worksheet
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
Chapter 06 Closing Entries and the Postclosing Trial Balance True / False Questions
1. One of the purposes of closing entries is to transfer net income or net loss for the period to the owner's capital account. True False
2. The owner's capital account is closed at the end of each accounting period. True False
3. The entry to close the revenue account Fees Income requires a debit to that account. True False
4. The entry to close an expense account requires a credit to the Income Summary account. True False
5. "Closing" is written in the Description column of the individual revenue and expense accounts in the general ledger. True False
6. A compound entry in the general journal is made to close expense accounts. True False
7. The entry to transfer net income to the owner's capital account would include a debit to the owner's capital account. True False
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
8. Withdrawals by the owner for personal use do not affect net income or net loss of the business. True False
9. After the closing entries are posted, the balance of the owner's capital account agrees with the amount of owner's equity shown on the balance sheet for the period. True False
10. The temporary owner's equity accounts are closed because they apply to only one accounting period. True False
11. "Income and Expense Summary" is another name for the Income Summary account. True False
12. The heading "Closing Entries" is usually written in the Description column of the general journal above the first closing entry. True False
13. The postclosing trial balance contains balance sheet accounts only. True False
14. "After-closing trial balance" is another name for the postclosing trial balance. True False
15. Interpreting the financial statements is the last step in the accounting cycle. True False
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
Fill in the Blank Questions
16. Data for the closing entries is taken from the ____________________ section of the worksheet. ________________________________________
17. The ____________________ entries transfer the results of operations to owner's equity. ________________________________________
18. The balance of the Income Summary account is transferred to the ____________________ account. ________________________________________
19. At the end of the accounting period, the balances of the revenue and expense accounts are transferred to the ____________________ account. ________________________________________
20. If the Income Summary account has a debit balance before it is closed, the firm experienced a net ____________________ from operations. ________________________________________
21. In the closing procedure, the ____________________ account balances are transferred to the debit side of the Income Summary account. ________________________________________
22. The final closing entry transfers the balance of the ____________________ account to the owner's capital account. ________________________________________
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
23. The Income Summary account is classified as a(n) ____________________ owner's equity account. ________________________________________
24. After all the closing entries are posted to the ledger, the Income Summary account will have a ____________________ balance. ________________________________________
25. After all the closing entries are posted, the ____________________ account reflects the results of operations for the period. ________________________________________
26. The ____________________ entries reduce the balances of the revenue, expense, and drawing accounts to zero so that they are ready to receive data for the next period. ________________________________________
27. The firm had net income if the entry to close the Income Summary account is recorded as a ____________________ to the owner's capital account. ________________________________________
28. The ____________________ trial balance is prepared to make sure that the general ledger is in balance after adjusting and closing entries have been recorded and posted. ________________________________________
29. The postclosing trial balance lists only the asset, ____________________, and owner's capital accounts. ________________________________________
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
30. The ____________________ is a series of steps performed during each fiscal period to classify and record transactions and summarize financial data for a business. ________________________________________
Multiple Choice Questions
31. One purpose of closing entries is to give zero balances to A. asset and liability accounts. B. liability and capital accounts. C. revenue and expense accounts. D. expense and capital accounts.
32. After the closing entries are posted to the ledger, each expense account will have A. a debit balance. B. a credit balance. C. either a debit or a credit balance. D. a zero balance.
33. Which of the following accounts is not closed? A. Cash B. Fees Income C. Rent Expense D. Joan Wilson, Drawing
34. The entry to close the Income Summary account may include A. a debit to Income Summary and a credit to the owner's capital account. B. a debit to Income Summary and a credit to Cash. C. a debit to Cash and a credit to Income Summary. D. a debit to Income Summary and a credit to the owner's drawing account.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
35. Which of the following accounts will not normally have a zero balance after the closing entries have been posted? A. Income Summary B. Fees Income C. The owner's capital account D. Rent Expense
36. One purpose of closing entries is to A. transfer the results of operations to owner's equity. B. reduce the owner's capital account balance to zero so that the account is ready for the next period. C. adjust the ledger account balances to provide complete and accurate figures for use on financial statements. D. close all accounts so that the ledger is ready for the next accounting period.
37. The entry to transfer a net loss to the owner's capital account would include a debit to A. the owner's capital account and a credit to Cash. B. the owner's drawing account and a credit to the owner's capital account. C. Income Summary and a credit to the owner's capital account. D. the owner's capital account and a credit to Income Summary.
38. The revenue account Fees Income is closed by debiting A. Cash and crediting Fees Income. B. Fees Income and crediting Income Summary. C. the owner's capital account and crediting Fees Income. D. Income Summary and crediting Fees Income.
39. The owner's drawing account is closed by debiting A. the owner's drawing account and crediting the owner's capital account. B. the owner's capital account and crediting the owner's drawing account. C. Income Summary and crediting the owner's drawing account. D. the owner's drawing account and crediting Income Summary.
6-6 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Closing Entries and the Postclosing Trial Balance
40. Which of the following statements is not correct? A. Before the Income Summary account is closed, its balance represents the net income or net loss for the accounting period. B. The Income Summary account is a temporary owner's equity account. C. The Income Summary account is used only at the end of an accounting period to help with the closing procedure. D. The owner's drawing account is closed to the Income Summary Statement.
41. The entry to close the Depreciation Expense account would include a debit to A. the Income Summary account and a credit to the Depreciation Expense account. B. the Income Summary and a credit to Cash. C. Cash and a credit to the Income Summary account. D. the Depreciation Expense account and a credit to the Income Summary account.
42. The entry to close the owner's drawing account would include a debit to the A. Income Summary account and a credit to the owner's drawing account. B. owner's drawing account and a credit to Cash. C. owner's capital account and a credit to the owner's drawing account. D. owner's drawing account and a credit to the Income Summary account.
43. The entry to close the Accumulated Depreciation account may include a debit to A. the Income Summary account and a credit to the Accumulated Depreciation account. B. the Depreciation Expense account and a credit to the Accumulated Depreciation account. C. the Accumulated Depreciation account and a credit to the Income Summary account. D. none of the above.
44. Which of the following accounts would be closed? A. Accounts Receivable B. Accumulated Depreciation C. Supplies Expense D. Joan Wilson, Capital
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
45. Entries required to zero the balances of the temporary accounts at the end of the year are called A. posting entries. B. adjusting entries. C. closing entries. D. correcting entries.
46. If a business has a net loss for a fiscal period, the journal entry to close the Income Summary account is A. a debit to Income Summary and a credit to Fees Income. B. a debit to Income Summary and a credit to Capital. C. a debit to Capital and a credit to Income Summary. D. a debit to Capital and a credit to Drawing.
47. Which of the following entries records the closing of Penny Pincher, Drawing at the end of the accounting period? A. Debit Penny Pincer, Drawing; credit Penny Pincher, Capital B. Debit Penny Pincher, Capital; credit Income Summary C. Debit Income Summary; credit Penny Pincher, Drawing D. Debit Penny Pincher, Capital; credit Penny Pincher, Drawing
48. Which of the following accounts would not be involved in any of the closing entries? A. Accounts Payable B. Fred Sanford, Drawing C. Income from Services D. Advertising Expense
49. The first step in the closing process is to close A. the drawing account B. the capital account C. the revenue accounts D. the expense accounts
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
50. The first two closing entries to the Income Summary account indicate a debit of $53,000 and a credit of $64,000. The third closing entry would be A. debit Capital $11,000; credit Income Summary $11,000 B. debit Income Summary $11,000; credit Capital $11,000 C. debit Revenue $64,000; credit Expenses $53,000 D. debit Income Summary $11,000; credit Drawing $11,000
51. When done properly, how many journal entries are involved in the closing process? A. 2 B. 3 C. 4 D. 5
52. After the closing entries are posted to the ledger, each revenue account will have A. a zero balance. B. a debit balance. C. a credit balance. D. either a debit or a credit balance.
53. A postclosing trial balance could include all of the following except the A. owner's capital account. B. Cash account. C. Fees Income account. D. Accounts Receivable account.
54. Which of the following accounts is a permanent account? A. Supplies B. Supplies Expense C. Owner's drawing D. Fees Income
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
55. All of the following accounts will appear on the postclosing trial balance except A. Equipment. B. Accumulated Depreciation--Equipment. C. Depreciation Expense--Equipment. D. Accounts Payable.
56. Which of the following statements is not correct? A. After closing entries are posted, the revenue, expense, and drawing accounts will have zero balances. B. At the end of each accounting period, asset and liability account balances are reduced to zero. C. A postclosing trial balance will not contain revenue and expense account balances. D. Adjusting entries must be journalized and posted before the closing entries are journalized and posted.
57. Which of the following statements is not correct? A. If the postclosing trial balance does not balance, there are errors in the accounting records. B. The audit trial should be used to trace data through the accounting records to find and correct errors. C. The balance of the owner's capital account, as reflected on the postclosing trial balance, will match the amount reported on the income statement. D. The balance of the owner's capital account on the adjusted trial balance will usually be different than that reported on the postclosing trial balance.
58. During the closing process, Accumulated Depreciation--Equipment will A. be closed to the income summary account B. be closed to the capital account C. be closed to the drawing account D. not be used
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
59. Which of the following accounts has a normal debit balance? A. Accounts Receivable B. Accounts Payable C. Fees Income D. T. Stark, Capital
60. Which of the following has a normal credit balance? A. Accounts Receivable B. Accounts Payable C. Supplies Expense D. T. Stark, Drawing
61. Which of the following statements is correct? A. The Balance Sheet section of the worksheet contains the data that is used to make closing entries. B. The balance of the owner's drawing account will appear on the postclosing trial balance. C. Closing entries are entered directly on the worksheet. D. Preparation of the postclosing trial balance is the last step in the end-of-period routine.
62. Information in the financial statements provides answers to many questions, including: A. How much do customers owe the business? B. What are the business' current and long term plans for expansion? C. Has the business achieved its net income goal for the year? D. All of the above.
63. The asset, liability, and owner's capital accounts appear on all of the following except the A. income statement. B. balance sheet. C. postclosing trial balance. D. worksheet.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
64. After the worksheet has been completed, the next step in the accounting cycle is to A. journalize and post the closing entries. B. journalize and post the adjusting entries. C. prepare the postclosing trial balance. D. prepare the financial statements.
65. After the transactions have been posted, the next step in the accounting cycle is to A. prepare the financial statements. B. prepare the postclosing trial balance. C. prepare the worksheet. D. journalize and post the adjusting entries.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
Short Answer Questions
66. The partial worksheet for the Jamison Company showed the following data on October 31, 2013. Record the closing entries on page 6 of a general journal.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
67. The partial worksheet for the Roberts Company showed the following data on October 31, 2013. Record the closing entries on page 9 of a general journal.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
68. On December 31, the ledger of Hartley Engineering Company contained the following account balances:
All the accounts have normal balances. Journalize the closing entries. Use 6 as the general journal page number.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
69. On December 31, the ledger of Davis Company contained the following account balances:
All the accounts have normal balances. Journalize the closing entries. Use 11 as the general journal page number.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
70. The adjusted ledger accounts of RD Consulting on December 31, 2013, appear as follows. All accounts have normal balances and adjusting entries have been made. Extend the balances to the Balance Sheet and Income Statement columns of the worksheet. Then, journalize the closing entries on page 4 of a general journal.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
71. The adjusted ledger accounts of Miraldi Landscaping Design on December 31, 2013, appear as follows. All accounts have normal balances and adjusting entries have been made. Extend the balances to the Balance Sheet and Income Statement columns of the worksheet. Then, journalize the closing entries on page 12 of a general journal.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
72. The Income Summary and Karen Randall, Capital accounts for Randall Printing Company at the end of its accounting period follow.
Complete the following statements. A. Total revenue for the period is ____________________. B. Total expenses for the period are ____________________. C. Net income (loss) for the period is ____________________. D. Owner's withdrawals for the period are ____________________.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
73. The Income Summary and Meryl Sussman, Capital accounts for Sussman Interior Design Services at the end of its accounting period follow.
Complete the following statements. A. Total revenue for the period is ____________________. B. Total expenses for the period are ____________________. C. Net income (loss) for the period is ____________________. D. Owner's withdrawals for the period are ____________________.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
74. On December 31, the Income Summary account of Coulter Company has a credit balance of $20,000 after revenue of $89,000 and expenses of $69,000 were closed to the account. Joseph Coulter, Drawing has a debit balance of $3,000 and Joseph Coulter, Capital has a credit balance of $45,000. Record the journal entries necessary to complete closing the accounts. Use 14 as the general journal page number. Then, post the closing entries to the Joseph Coulter, Capital account.
75. On December 31 the Income Summary account of Cook Company has a debit balance of $18,000 after revenue of $49,000 and expenses of $67,000 were closed to the account. Maria Cook, Drawing has a debit balance of $23,000 and Maria Cook, Capital has a credit balance of $84,000. Record the journal entries necessary to complete closing the accounts. Use 22 as the general journal page number. Then, post the closing entries to the Maria Cook, Capital account.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
76. From the following list identify the accounts that will appear on the postclosing trial balance by placing an X before those accounts. ___ A. Cash ___ B. Accounts Receivable ___ C. Supplies ___ D. Equipment ___ E. Accumulated Depreciation ___ F. Accounts Payable ___ G. Jane Nelson, Capital ___ H. Jane Nelson, Drawing ___ I. Fees Income ___ J. Depreciation Expense ___ K. Salaries Expense ___ L. Supplies Expense ___ M. Utilities Expense
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
77. From the following list identify the accounts that will appear on the postclosing trial balance by placing an X before those accounts. ___ A. Accounts Payable ___ B. Accounts Receivable ___ C. Accumulated Depreciation ___ D. Cash ___ E. Depreciation Expense ___ F. Equipment ___ G. Fees Income ___ H. Allie Lee, Capital ___ I. Allie Lee, Drawing ___ J. Salaries Expense ___ K. Supplies ___ L. Supplies Expense ___ M. Utilities Expense
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
78. Dorsey Company's partial worksheet for the month ended March 31, 2013, is shown below. Open the owner's capital account (account number 301) in the general ledger and record the March 1, 2013, balance of $32,000 shown on the worksheet. Journalize the closing entries on page 3 of a general journal. Post the closing entries to the owner's capital account. Prepare a postclosing trial balance.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
79. Danos Company's partial worksheet for the month ended December 31, 2013, is shown below. Open the owner's capital account (account number 301) in the general ledger and record the December 1, 2013, balance of $64,000 shown on the worksheet. Journalize the closing entries on page 8 of a general journal. Post the closing entries to the owner's capital account. Prepare a postclosing trial balance.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
80. Managers often consult financial statements for specific types of information. Indicate whether each of the following items would appear on the income statement, statement of owner's equity, or the balance sheet. Note that an item may appear on more than one statement. The first item is completed as an example.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
81. Managers often consult financial statements for specific types of information. Indicate whether each of the following items would appear on the income statement, statement of owner's equity, or the balance sheet. Note that an item may appear on more than one statement. The first item is completed as an example.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
Essay Questions
82. Following are the steps in the accounting cycle. Arrange the steps in the proper sequence. A. Analyze transactions. B. Interpret the financial information. C. Journalize the transactions. D. Post the journal entries. E. Prepare a postclosing trial balance. F. Prepare financial statements. G. Prepare a worksheet. H. Record adjusting entries. I. Record closing entries. ___ 1. ___ 2. ___ 3. ___ 4. ___ 5. ___ 6. ___ 7. ___ 8. ___ 9.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
Matching Questions
83. Match the accounting terms with the description by entering the proper number. 1. To understand and explain the meaning and importance of something (such as financial statements) Interpret ____ 2. A special owner's equity account that is used only in the closing process to summarize the results of operations Closing entries ____ 3. A statement that is prepared to prove the equality of total debits and credits after the closing process is Postclosing trial completed balance ____ 4. Journal entries that transfer the results of operations (net income or net loss) to owner's equity and reduce the Income revenue, expense, and drawing account balances to zero Summary account ____
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
Chapter 06 Closing Entries and the Postclosing Trial Balance Answer Key
True / False Questions
1. One of the purposes of closing entries is to transfer net income or net loss for the period to the owner's capital account. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
2. The owner's capital account is closed at the end of each accounting period. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
3. The entry to close the revenue account Fees Income requires a debit to that account. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
4. The entry to close an expense account requires a credit to the Income Summary account. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
5. "Closing" is written in the Description column of the individual revenue and expense accounts in the general ledger. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
6. A compound entry in the general journal is made to close expense accounts. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
7. The entry to transfer net income to the owner's capital account would include a debit to the owner's capital account. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
8. Withdrawals by the owner for personal use do not affect net income or net loss of the business. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
9. After the closing entries are posted, the balance of the owner's capital account agrees with the amount of owner's equity shown on the balance sheet for the period. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
10. The temporary owner's equity accounts are closed because they apply to only one accounting period. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
11. "Income and Expense Summary" is another name for the Income Summary account. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
12. The heading "Closing Entries" is usually written in the Description column of the general journal above the first closing entry. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
13. The postclosing trial balance contains balance sheet accounts only. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Easy Topic: Using Accounting Information
14. "After-closing trial balance" is another name for the postclosing trial balance. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Easy Topic: Using Accounting Information
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
15. Interpreting the financial statements is the last step in the accounting cycle. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 06-03 Interpret financial statements. Level: Easy Topic: Using Accounting Information
Fill in the Blank Questions
16. Data for the closing entries is taken from the ____________________ section of the worksheet. Income Statement
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
17. The ____________________ entries transfer the results of operations to owner's equity. closing
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
18. The balance of the Income Summary account is transferred to the ____________________ account. owner's capital
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
19. At the end of the accounting period, the balances of the revenue and expense accounts are transferred to the ____________________ account. Income Summary
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
20. If the Income Summary account has a debit balance before it is closed, the firm experienced a net ____________________ from operations. loss
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
21. In the closing procedure, the ____________________ account balances are transferred to the debit side of the Income Summary account. expense
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
22. The final closing entry transfers the balance of the ____________________ account to the owner's capital account. owner's drawing
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
23. The Income Summary account is classified as a(n) ____________________ owner's equity account. temporary
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
24. After all the closing entries are posted to the ledger, the Income Summary account will have a ____________________ balance. zero
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
25. After all the closing entries are posted, the ____________________ account reflects the results of operations for the period. owner's capital
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
26. The ____________________ entries reduce the balances of the revenue, expense, and drawing accounts to zero so that they are ready to receive data for the next period. closing
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
27. The firm had net income if the entry to close the Income Summary account is recorded as a ____________________ to the owner's capital account. credit
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Hard Topic: Closing Entries
28. The ____________________ trial balance is prepared to make sure that the general ledger is in balance after adjusting and closing entries have been recorded and posted. postclosing
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Easy Topic: Using Accounting Information
29. The postclosing trial balance lists only the asset, ____________________, and owner's capital accounts. liability
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Easy Topic: Using Accounting Information
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
30. The ____________________ is a series of steps performed during each fiscal period to classify and record transactions and summarize financial data for a business. accounting cycle
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 06-04 Review the steps in the accounting cycle. Level: Easy Topic: Using Accounting Information
Multiple Choice Questions
31. One purpose of closing entries is to give zero balances to A. asset and liability accounts. B. liability and capital accounts. C. revenue and expense accounts. D. expense and capital accounts.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
32. After the closing entries are posted to the ledger, each expense account will have A. a debit balance. B. a credit balance. C. either a debit or a credit balance. D. a zero balance.
AACSB: Analytic AICPA FN: Reporting Bloom's: Evaluate Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
33. Which of the following accounts is not closed? A. Cash B. Fees Income C. Rent Expense D. Joan Wilson, Drawing
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
34. The entry to close the Income Summary account may include A. a debit to Income Summary and a credit to the owner's capital account. B. a debit to Income Summary and a credit to Cash. C. a debit to Cash and a credit to Income Summary. D. a debit to Income Summary and a credit to the owner's drawing account.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
35. Which of the following accounts will not normally have a zero balance after the closing entries have been posted? A. Income Summary B. Fees Income C. The owner's capital account D. Rent Expense
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
36. One purpose of closing entries is to A. transfer the results of operations to owner's equity. B. reduce the owner's capital account balance to zero so that the account is ready for the next period. C. adjust the ledger account balances to provide complete and accurate figures for use on financial statements. D. close all accounts so that the ledger is ready for the next accounting period.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
37. The entry to transfer a net loss to the owner's capital account would include a debit to A. the owner's capital account and a credit to Cash. B. the owner's drawing account and a credit to the owner's capital account. C. Income Summary and a credit to the owner's capital account. D. the owner's capital account and a credit to Income Summary.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
38. The revenue account Fees Income is closed by debiting A. Cash and crediting Fees Income. B. Fees Income and crediting Income Summary. C. the owner's capital account and crediting Fees Income. D. Income Summary and crediting Fees Income.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
39. The owner's drawing account is closed by debiting A. the owner's drawing account and crediting the owner's capital account. B. the owner's capital account and crediting the owner's drawing account. C. Income Summary and crediting the owner's drawing account. D. the owner's drawing account and crediting Income Summary.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
40. Which of the following statements is not correct? A. Before the Income Summary account is closed, its balance represents the net income or net loss for the accounting period. B. The Income Summary account is a temporary owner's equity account. C. The Income Summary account is used only at the end of an accounting period to help with the closing procedure. D. The owner's drawing account is closed to the Income Summary Statement.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 06-01 Journalize and post closing entries. Level: Hard Topic: Closing Entries
41. The entry to close the Depreciation Expense account would include a debit to A. the Income Summary account and a credit to the Depreciation Expense account. B. the Income Summary and a credit to Cash. C. Cash and a credit to the Income Summary account. D. the Depreciation Expense account and a credit to the Income Summary account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
42. The entry to close the owner's drawing account would include a debit to the A. Income Summary account and a credit to the owner's drawing account. B. owner's drawing account and a credit to Cash. C. owner's capital account and a credit to the owner's drawing account. D. owner's drawing account and a credit to the Income Summary account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
43. The entry to close the Accumulated Depreciation account may include a debit to A. the Income Summary account and a credit to the Accumulated Depreciation account. B. the Depreciation Expense account and a credit to the Accumulated Depreciation account. C. the Accumulated Depreciation account and a credit to the Income Summary account. D. none of the above.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
44. Which of the following accounts would be closed? A. Accounts Receivable B. Accumulated Depreciation C. Supplies Expense D. Joan Wilson, Capital
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
45. Entries required to zero the balances of the temporary accounts at the end of the year are called A. posting entries. B. adjusting entries. C. closing entries. D. correcting entries.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
46. If a business has a net loss for a fiscal period, the journal entry to close the Income Summary account is A. a debit to Income Summary and a credit to Fees Income. B. a debit to Income Summary and a credit to Capital. C. a debit to Capital and a credit to Income Summary. D. a debit to Capital and a credit to Drawing.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
47. Which of the following entries records the closing of Penny Pincher, Drawing at the end of the accounting period? A. Debit Penny Pincer, Drawing; credit Penny Pincher, Capital B. Debit Penny Pincher, Capital; credit Income Summary C. Debit Income Summary; credit Penny Pincher, Drawing D. Debit Penny Pincher, Capital; credit Penny Pincher, Drawing
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
48. Which of the following accounts would not be involved in any of the closing entries? A. Accounts Payable B. Fred Sanford, Drawing C. Income from Services D. Advertising Expense
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
49. The first step in the closing process is to close A. the drawing account B. the capital account C. the revenue accounts D. the expense accounts
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
50. The first two closing entries to the Income Summary account indicate a debit of $53,000 and a credit of $64,000. The third closing entry would be A. debit Capital $11,000; credit Income Summary $11,000 B. debit Income Summary $11,000; credit Capital $11,000 C. debit Revenue $64,000; credit Expenses $53,000 D. debit Income Summary $11,000; credit Drawing $11,000
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
51. When done properly, how many journal entries are involved in the closing process? A. 2 B. 3 C. 4 D. 5
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
52. After the closing entries are posted to the ledger, each revenue account will have A. a zero balance. B. a debit balance. C. a credit balance. D. either a debit or a credit balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Easy Topic: Using Accounting Information
53. A postclosing trial balance could include all of the following except the A. owner's capital account. B. Cash account. C. Fees Income account. D. Accounts Receivable account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Medium Topic: Using Accounting Information
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
54. Which of the following accounts is a permanent account? A. Supplies B. Supplies Expense C. Owner's drawing D. Fees Income
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Easy Topic: Using Accounting Information
55. All of the following accounts will appear on the postclosing trial balance except A. Equipment. B. Accumulated Depreciation--Equipment. C. Depreciation Expense--Equipment. D. Accounts Payable.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Easy Topic: Using Accounting Information
56. Which of the following statements is not correct? A. After closing entries are posted, the revenue, expense, and drawing accounts will have zero balances. B. At the end of each accounting period, asset and liability account balances are reduced to zero. C. A postclosing trial balance will not contain revenue and expense account balances. D. Adjusting entries must be journalized and posted before the closing entries are journalized and posted.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 06-01 Journalize and post closing entries. Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Hard Topic: Closing Entries Topic: Using Accounting Information
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
57. Which of the following statements is not correct? A. If the postclosing trial balance does not balance, there are errors in the accounting records. B. The audit trial should be used to trace data through the accounting records to find and correct errors. C. The balance of the owner's capital account, as reflected on the postclosing trial balance, will match the amount reported on the income statement. D. The balance of the owner's capital account on the adjusted trial balance will usually be different than that reported on the postclosing trial balance.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Hard Topic: Using Accounting Information
58. During the closing process, Accumulated Depreciation--Equipment will A. be closed to the income summary account B. be closed to the capital account C. be closed to the drawing account D. not be used
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Easy Topic: Using Accounting Information
59. Which of the following accounts has a normal debit balance? A. Accounts Receivable B. Accounts Payable C. Fees Income D. T. Stark, Capital
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Easy Topic: Using Accounting Information
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
60. Which of the following has a normal credit balance? A. Accounts Receivable B. Accounts Payable C. Supplies Expense D. T. Stark, Drawing
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Easy Topic: Using Accounting Information
61. Which of the following statements is correct? A. The Balance Sheet section of the worksheet contains the data that is used to make closing entries. B. The balance of the owner's drawing account will appear on the postclosing trial balance. C. Closing entries are entered directly on the worksheet. D. Preparation of the postclosing trial balance is the last step in the end-of-period routine.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 06-01 Journalize and post closing entries. Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Hard Topic: Closing Entries Topic: Using Accounting Information
62. Information in the financial statements provides answers to many questions, including: A. How much do customers owe the business? B. What are the business' current and long term plans for expansion? C. Has the business achieved its net income goal for the year? D. All of the above.
AACSB: Communication AICPA BB: Industry Bloom's: Remember Learning Objective: 06-03 Interpret financial statements. Level: Easy Topic: Using Accounting Information
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
63. The asset, liability, and owner's capital accounts appear on all of the following except the A. income statement. B. balance sheet. C. postclosing trial balance. D. worksheet.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 06-03 Interpret financial statements. Level: Medium Topic: Using Accounting Information
64. After the worksheet has been completed, the next step in the accounting cycle is to A. journalize and post the closing entries. B. journalize and post the adjusting entries. C. prepare the postclosing trial balance. D. prepare the financial statements.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 06-04 Review the steps in the accounting cycle. Level: Medium Topic: Using Accounting Information
65. After the transactions have been posted, the next step in the accounting cycle is to A. prepare the financial statements. B. prepare the postclosing trial balance. C. prepare the worksheet. D. journalize and post the adjusting entries.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 06-04 Review the steps in the accounting cycle. Level: Medium Topic: Using Accounting Information
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
Short Answer Questions
66. The partial worksheet for the Jamison Company showed the following data on October 31, 2013. Record the closing entries on page 6 of a general journal.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
67. The partial worksheet for the Roberts Company showed the following data on October 31, 2013. Record the closing entries on page 9 of a general journal.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
68. On December 31, the ledger of Hartley Engineering Company contained the following account balances:
All the accounts have normal balances. Journalize the closing entries. Use 6 as the general journal page number.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
69. On December 31, the ledger of Davis Company contained the following account balances:
All the accounts have normal balances. Journalize the closing entries. Use 11 as the general journal page number.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 06-01 Journalize and post closing entries. Level: Easy Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
70. The adjusted ledger accounts of RD Consulting on December 31, 2013, appear as follows. All accounts have normal balances and adjusting entries have been made. Extend the balances to the Balance Sheet and Income Statement columns of the worksheet. Then, journalize the closing entries on page 4 of a general journal.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
71. The adjusted ledger accounts of Miraldi Landscaping Design on December 31, 2013, appear as follows. All accounts have normal balances and adjusting entries have been made. Extend the balances to the Balance Sheet and Income Statement columns of the worksheet. Then, journalize the closing entries on page 12 of a general journal.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
72. The Income Summary and Karen Randall, Capital accounts for Randall Printing Company at the end of its accounting period follow.
Complete the following statements. A. Total revenue for the period is ____________________. B. Total expenses for the period are ____________________. C. Net income (loss) for the period is ____________________. D. Owner's withdrawals for the period are ____________________. (A) $46,500, (B) $30,300, (C) $16,200 Net Income, (D) $6,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
73. The Income Summary and Meryl Sussman, Capital accounts for Sussman Interior Design Services at the end of its accounting period follow.
Complete the following statements. A. Total revenue for the period is ____________________. B. Total expenses for the period are ____________________. C. Net income (loss) for the period is ____________________. D. Owner's withdrawals for the period are ____________________. (A) $70,000, (B) $120,000, (C) $50,000 Net Loss, (D) $10,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
74. On December 31, the Income Summary account of Coulter Company has a credit balance of $20,000 after revenue of $89,000 and expenses of $69,000 were closed to the account. Joseph Coulter, Drawing has a debit balance of $3,000 and Joseph Coulter, Capital has a credit balance of $45,000. Record the journal entries necessary to complete closing the accounts. Use 14 as the general journal page number. Then, post the closing entries to the Joseph Coulter, Capital account.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
75. On December 31 the Income Summary account of Cook Company has a debit balance of $18,000 after revenue of $49,000 and expenses of $67,000 were closed to the account. Maria Cook, Drawing has a debit balance of $23,000 and Maria Cook, Capital has a credit balance of $84,000. Record the journal entries necessary to complete closing the accounts. Use 22 as the general journal page number. Then, post the closing entries to the Maria Cook, Capital account.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 06-01 Journalize and post closing entries. Level: Medium Topic: Closing Entries
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
76. From the following list identify the accounts that will appear on the postclosing trial balance by placing an X before those accounts. ___ A. Cash ___ B. Accounts Receivable ___ C. Supplies ___ D. Equipment ___ E. Accumulated Depreciation ___ F. Accounts Payable ___ G. Jane Nelson, Capital ___ H. Jane Nelson, Drawing ___ I. Fees Income ___ J. Depreciation Expense ___ K. Salaries Expense ___ L. Supplies Expense ___ M. Utilities Expense A, B, C, D, E, F, G
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Easy Topic: Using Accounting Information
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
77. From the following list identify the accounts that will appear on the postclosing trial balance by placing an X before those accounts. ___ A. Accounts Payable ___ B. Accounts Receivable ___ C. Accumulated Depreciation ___ D. Cash ___ E. Depreciation Expense ___ F. Equipment ___ G. Fees Income ___ H. Allie Lee, Capital ___ I. Allie Lee, Drawing ___ J. Salaries Expense ___ K. Supplies ___ L. Supplies Expense ___ M. Utilities Expense A, B, C, D, F, H, K
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Easy Topic: Using Accounting Information
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
78. Dorsey Company's partial worksheet for the month ended March 31, 2013, is shown below. Open the owner's capital account (account number 301) in the general ledger and record the March 1, 2013, balance of $32,000 shown on the worksheet. Journalize the closing entries on page 3 of a general journal. Post the closing entries to the owner's capital account. Prepare a postclosing trial balance.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 06-01 Journalize and post closing entries. Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Medium Topic: Closing Entries Topic: Using Accounting Information
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
79. Danos Company's partial worksheet for the month ended December 31, 2013, is shown below. Open the owner's capital account (account number 301) in the general ledger and record the December 1, 2013, balance of $64,000 shown on the worksheet. Journalize the closing entries on page 8 of a general journal. Post the closing entries to the owner's capital account. Prepare a postclosing trial balance.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 06-01 Journalize and post closing entries. Learning Objective: 06-02 Prepare a postclosing trial balance. Level: Medium Topic: Closing Entries Topic: Using Accounting Information
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
80. Managers often consult financial statements for specific types of information. Indicate whether each of the following items would appear on the income statement, statement of owner's equity, or the balance sheet. Note that an item may appear on more than one statement. The first item is completed as an example.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 06-03 Interpret financial statements. Level: Medium Topic: Using Accounting Information
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
81. Managers often consult financial statements for specific types of information. Indicate whether each of the following items would appear on the income statement, statement of owner's equity, or the balance sheet. Note that an item may appear on more than one statement. The first item is completed as an example.
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 06-03 Interpret financial statements. Level: Medium Topic: Using Accounting Information
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
Essay Questions
82. Following are the steps in the accounting cycle. Arrange the steps in the proper sequence. A. Analyze transactions. B. Interpret the financial information. C. Journalize the transactions. D. Post the journal entries. E. Prepare a postclosing trial balance. F. Prepare financial statements. G. Prepare a worksheet. H. Record adjusting entries. I. Record closing entries. ___ 1. ___ 2. ___ 3. ___ 4. ___ 5. ___ 6. ___ 7. ___ 8. ___ 9. (1) A, (2) C, (3) D, (4) G, (5) F, (6) H, (7) I, (8) E, (9) B
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 06-04 Review the steps in the accounting cycle. Level: Hard Topic: Using Accounting Information
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Chapter 06 - Closing Entries and the Postclosing Trial Balance
Matching Questions
83. Match the accounting terms with the description by entering the proper number. 1. To understand and explain the meaning and importance of something (such as financial statements) Interpret 1 2. A special owner's equity account that is used only in the closing process to summarize the results of operations Closing entries 4 3. A statement that is prepared to prove the equality of total Postclosing trial debits and credits after the closing process is completed balance 3 4. Journal entries that transfer the results of operations (net income or net loss) to owner's equity and reduce the Income revenue, expense, and drawing account balances to zero Summary account 2 AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 06-01 Journalize and post closing entries. Learning Objective: 06-02 Prepare a postclosing trial balance. Learning Objective: 06-03 Interpret financial statements. Learning Objective: 06-04 Review the steps in the accounting cycle. Learning Objective: 06-05 Define the accounting terms new to this chapter. Level: Medium Topic: Closing Entries Topic: Using Accounting Information
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Chapter 07 - Accounting for Sales and Accounts Receivable
Chapter 07 Accounting for Sales and Accounts Receivable True / False Questions
1. A merchandising business sells goods that it produces. True False
2. The individual amounts in the Accounts Receivable Debit column of a sales journal should be posted to the accounts receivable subsidiary ledger, and the column total should be posted to the Accounts Receivable account in the general ledger. True False
3. To indicate that the column totals of the sales journal have been posted, a check mark is entered under the column total. True False
4. The abbreviation S1 in the Posting Reference column of an account shows that the data was posted from page 1 of the sales journal. True False
5. The balance of a customer's account in the accounts receivable ledger is circled to show that it is a debit amount. True False
6. The Sales Returns and Allowances account has a normal debit balance. True False
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Chapter 07 - Accounting for Sales and Accounts Receivable
7. A customer who returns goods or receives an allowance is entitled to a credit for the appropriate amount of sales tax if tax was charged on the original sale. True False
8. A sales return or a sales allowance is usually recorded in the sales journal. True False
9. The balance of the Sales Returns and Allowances account is subtracted from the balance of the Accounts Receivable account in the Assets section of the balance sheet. True False
10. After all postings have been made, the totals of the balances in the accounts receivable subsidiary ledger should equal the balance of the Accounts Receivable account in the general ledger. True False
11. In a small business, the customer accounts are usually kept in alphabetical order. True False
12. A wholesale business does not need a Sales Tax Payable account. True False
13. For a retailer, bank credit card sales are like cash sales. True False
14. When a business makes a sale on a bank credit card, the business is responsible for collecting from the customer. True False
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Chapter 07 - Accounting for Sales and Accounts Receivable
15. In some states, a firm receives a discount for paying the amount of sales tax due on time. True False
Fill in the Blank Questions
16. The source document for an entry in the sales journal is a(n) ____________________. ________________________________________
17. A(n) ____________________ business sells goods that it purchases in finished form for resale. ________________________________________
18. The entry to record a sale of merchandise on credit that is subject to sales tax includes a(n) ____________________ to Sales Tax Payable. ________________________________________
19. A business that sells goods and services directly to individual consumers is called a(n) ____________________ business. ________________________________________
20. The stock of goods kept on hand to sell to consumers is called _________________________. ________________________________________
21. A(n) ____________________ journal is a journal that is used to record only one type of transaction. ________________________________________
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Chapter 07 - Accounting for Sales and Accounts Receivable
22. A ledger that contains accounts of a single type is called a(n) ____________________ ledger. ________________________________________
23. Sales Tax Payable is classified as a(n) ____________________ account. ________________________________________
24. To indicate that an amount has been posted from the sales journal to the accounts receivable subsidiary ledger, a(n) ____________________ is placed in the Posting Reference column of the journal. ________________________________________
25. The ____________________ ledger contains accounts for credit customers. ________________________________________
26. The Sales Returns and Allowances account has a normal ____________________ balance. ________________________________________
27. A(n) ____________________ is a business form that is issued to a credit customer upon acceptance of the return of damaged goods. ________________________________________
28. A list of all unpaid balances in the accounts receivable subsidiary ledger is called a(n) ____________________ of accounts receivable. ________________________________________
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Chapter 07 - Accounting for Sales and Accounts Receivable
29. When an accounts receivable subsidiary ledger is used, the Accounts Receivable account in the general ledger is considered to be a(n) ____________________ account. ________________________________________
30. The reductions from list prices that many wholesale businesses offer their customers are called ____________________ discounts. ________________________________________
Multiple Choice Questions
31. In a firm that uses special journals, a sale of merchandise on credit is recorded in the A. cash payments journal. B. cash receipts journal. C. sales journal. D. purchases journal.
32. In a firm that uses special journals, the acceptance of a return of merchandise from a credit customer is recorded in the A. cash receipts journal. B. sales journal. C. cash payments journal. D. general journal.
33. In a firm that uses special journals, the sale of merchandise for cash is recorded in the A. cash payments journal. B. cash receipts journal. C. sales journal. D. purchases journal.
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Chapter 07 - Accounting for Sales and Accounts Receivable
34. In a firm that uses special journals, the purchase of merchandise on credit is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
35. In a firm that uses special journals, an allowance given for damaged merchandise is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
36. In a firm that uses special journals, the collection of sums on account from credit customers is recorded in the A. cash payments journal. B. cash receipts journal. C. sales journal. D. purchases journal.
37. In a firm that uses special journals, an additional cash investment received from the owner is recorded in the A. cash receipts journal. B. sales journal. C. cash payments journal. D. general journal.
38. In a firm that uses special journals, the issuance of a check to pay a creditor on account is recorded in the A. cash payments journal. B. cash receipts journal. C. sales journal. D. purchases journal.
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Chapter 07 - Accounting for Sales and Accounts Receivable
39. The Sales account is classified as A. a liability account. B. an asset account. C. a contra account. D. a revenue account.
40. A firm that sells goods that it purchases for re-sale is a A. service business. B. merchandising business. C. manufacturing business. D. non-profit business.
41. Merchandise is sold on credit for $600 plus 5 percent sales tax. The entry in the sales journal will include a debit to Accounts Receivable for A. $600.00. B. $603.50. C. $605.50. D. $630.00.
42. In a sales journal used to record taxable sales, the total of the Accounts Receivable column should equal A. the sum of the totals of the Sales Tax Payable column and the Sales column. B. the difference between the total of the Sales Tax Payable column and the total of the Sales column. C. the total of the Sales column. D. the total of the Sales Tax Payable column.
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Chapter 07 - Accounting for Sales and Accounts Receivable
43. Which of the following statements is correct? A. The sales journal is used for recording both cash sales and credit sales. B. Since the sales journal is used for a single purpose, there is no need to enter any descriptions. C. To provide an adequate audit trail, sales on credit should be recorded in both the sales journal and the general journal. D. The complete information for each sale of merchandise on credit can be recorded on one line of the cash receipts journal.
44. Which of the following statements is not correct? A. Use of a sales journal eliminates repetition in posting individual entries to the Accounts Receivable account in the general ledger. B. A journal that is used to record only one type of a transaction is called a special journal. C. The sales slip is the source document for sales on credit transactions. D. If the firm must collect sales tax on retail transactions, the sales journal should have a Sales Tax Payable Debit column.
45. Which of the following statements is not correct? A. Postings to the accounts receivable subsidiary ledger are usually made once a month on the last day of the month. B. Before any posting to the subsidiary ledger takes place, the equality of the debits and credits recorded in the sales journal are proved by comparing the column totals. C. Before any posting to the general ledger takes place, the equality of the debits and credits recorded in the sales journal are proved by comparing the column totals. D. When special journals are used, postings to the accounts receivable account in the general ledger are usually made once a month on the last day of the month.
46. To find the balance due from an individual customer, the accountant would refer to A. the sales journal. B. the Sales account in the general ledger. C. the accounts receivable subsidiary ledger. D. the Accounts Receivable account in the general ledger.
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Chapter 07 - Accounting for Sales and Accounts Receivable
47. The entry to record a return by a credit customer of defective merchandise on which no sales tax was charged includes A. a debit to Sales and a credit to Accounts Receivable. B. a debit to Sales and a credit to Sales Returns and Allowances. C. a debit to Sales Returns and Allowances and a credit to Accounts Receivable. D. a debit to Accounts Receivable and a credit to Sales Returns and Allowances.
48. If a firm does not have a sales returns and allowances journal, the entries for these transactions are made in A. the sales journal. B. the general journal. C. the cash receipts journal. D. the cash payments journal.
49. The Sales Returns and Allowances account is classified as A. an asset account. B. a contra asset account. C. an expense account. D. a contra revenue account.
50. The Sales Returns and Allowances account is presented A. on the balance sheet as a deduction from Accounts Receivable. B. on the income statement as a deduction from Sales. C. on the income statement as an addition to Sales. D. on the balance sheet as a deduction from Capital.
51. If a firm had sales of $50,000 during a period and sales returns and allowances of $4,000, its net sales were A. $54,000. B. $50,000. C. $46,000. D. $4,000.
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Chapter 07 - Accounting for Sales and Accounts Receivable
52. After all postings have been made, the total of the schedule of accounts receivable should equal A. the balance of the Sales account. B. the total of the Accounts Receivable Debit column in the sales journal. C. the balance of the Accounts Receivable account in the general ledger. D. the total of all sales on account for the accounting period.
53. A wholesale business sells goods with a list price of $900 and a trade discount of 40 percent. The net price is A. $360.00. B. $540.00. C. $900.00. D. $940.00.
54. The amount used by wholesalers to record sales in its sales journal is A. the retail price. B. the list price. C. the net price. D. the original price.
55. A retailer recorded the following in June: cash sales $2,000; credit sales, $9,000; sales returns and allowances, $1,000. Assuming the sales tax rate is 7 percent, the entry to record the sales tax payment includes a debit to Sales Tax Payable for A. $560. B. $630. C. $700. D. $770.
56. On Deck Sports Memorabilia store sells a Babe Ruth rookie card for $4,600 on account. If the sales tax on the sale is 8%, what is the amount debited to Accounts Receivable? A. $4,232 B. $4,968 C. $4,600 D. $4,592
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Chapter 07 - Accounting for Sales and Accounts Receivable
57. Which of the following describes Sales Tax Payable? A. A revenue account with a normal credit balance. B. A liability account with a normal debit balance. C. A liability account with a normal credit balance. D. An asset account with a normal debit balance.
58. Hugh Snow returned merchandise to Farley Co. The entry on the books of Farley company to record the return of merchandise from Hugh Snow would include a: A. Debit Accounts Payable B. Credit to Purchase Returns and Allowances C. Debit to Account Receivable D. Debit Sales Returns and Allowances
59. On the Income Statement, Sales Returns and Allowances have the effect of A. Increasing total revenue B. Increasing total expenses C. Decreasing total revenue D. Decreasing total expenses
60. An example of a merchandising company is a A. bookstore B. restaurant C. hair salon D. real estate office
61. Hour Place Clock Shop sold a grandfather clock for $2,250 subject to a 9% sales tax. The entry in the sales journal will include a debit to Accounts Receivable for A. $2,250.00 B. $2,092.50 C. $2,452.50 D. $2,362.00
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Chapter 07 - Accounting for Sales and Accounts Receivable
62. Hour Place Clock Shop sold a grandfather clock for $2,250 subject to a 9% sales tax. The entry in the sales journal will include a credit to Sales for A. $2,250.00 B. $2,092.50 C. $2,452.50 D. $2,362.00
63. Which of the following describes Sales Returns and Allowances? A. A revenue account with a normal credit balance. B. An expense account with a normal debit balance. C. A contra revenue account with a normal debit balance. D. A contra expense account with a normal credit balance.
64. The amount of the trade discount taken by the customer is recorded as a(n) A. asset. B. liability. C. expense. D. sales recorded net of trade discounts.
65. Kay Sadia sold merchandise for $8,750 subject to a 6% sales tax. The entry in the sales journal will include a debit to Accounts Receivable for A. $9,275.00 B. $8,225.00 C. $8,750.00 D. $8,462.00
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Chapter 07 - Accounting for Sales and Accounts Receivable
Short Answer Questions
66. For each of the transactions listed below, identify the journal that should be used to record the transaction. Use CR for cash receipts journal, CP for cash payments journal, S for sales journal, P for purchases journal, and G for general journal. A. Accepted a return of merchandise from a credit customer B. Collected sums on account from credit customers C. Gave an allowance for damaged merchandise D. Purchased merchandise on credit E. Received an additional cash investment from the owner F. Sold merchandise for cash G. Sold merchandise on credit H. Issued a check to pay a creditor on account
67. Read the description of following transactions that are required during the accounting period for Drummond Consulting Services. Determine the account to be debited and the account to be credited. A. Sold merchandise on credit. The transaction involved sales tax. B. Accepted a return of merchandise from a credit customer. The original sale involved sales tax. C. Received a check from a credit customer on account. D. Sold merchandise on credit. The transaction did not involve sales tax. E. Gave an allowance to a credit customer for damaged merchandise. The original sale involved sales tax.
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Chapter 07 - Accounting for Sales and Accounts Receivable
68. Read the description of following transactions that are required during the accounting period for Mario's Electronics. Determine the account and amount to be debited and the account and amount to be credited. A. Gave a $300 allowance to a credit customer for damaged merchandise. The original sale involved a 10 percent sales tax. B. Accepted a return of $150 in merchandise from a credit customer. The original sale involved 5 percent sales tax. C. Sold $200 in merchandise for cash. The transaction involved 8 percent sales tax. D. Received a check for $50 from a credit customer on account. E. Sold $1,200 in merchandise on credit. The transaction did not involve sales tax.
69. The sales journal for Carothers Company is shown below. Describe how the amounts would be posted to the general ledger accounts.
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Chapter 07 - Accounting for Sales and Accounts Receivable
70. The sales journal for Simon Company is shown below. Describe how the amounts would be posted to the accounts receivable subsidiary ledger accounts.
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Chapter 07 - Accounting for Sales and Accounts Receivable
71. Bradley's Appliance Store had the following transactions during the month of May 2013. Record the transactions on page 5 of a sales journal and page 8 of a general journal. Total, prove, and rule the sales journal as of May 31.
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Chapter 07 - Accounting for Sales and Accounts Receivable
72. Barnett's Electronics Store had the following transactions during the month of January 2013. Record the transactions on page 1 of a sales journal and page 1 of a general journal. Total, prove, and rule the sales journal as of January 31.
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Chapter 07 - Accounting for Sales and Accounts Receivable
73. All That Jazz Music Store had the following transactions during the month of August 2013. Record the transactions on page 15 of a sales journal and page 18 of a general journal. Total, prove, and rule the sales journal as of August 31.
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Chapter 07 - Accounting for Sales and Accounts Receivable
74. One of the customer accounts from the accounts receivable ledger for Paragon Consulting Services is shown below. Explain each of the entries that have been posted to this customer's subsidiary ledger account.
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Chapter 07 - Accounting for Sales and Accounts Receivable
75. One of the customer accounts from the accounts receivable ledger for Rogers Flooring is shown below. Explain each of the entries that have been posted to this customer's subsidiary ledger account.
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Chapter 07 - Accounting for Sales and Accounts Receivable
76. One of the customer accounts from the accounts receivable ledger for Toulouse Company is shown below. Explain each of the entries that have been posted to this customer's subsidiary ledger account.
77. Selected balances from the general ledger of the All Star Video Rentals on July 31, 2013, are listed below. Use the appropriate data to prepare the Revenue section of the firm's income statement for the month ended July 31, 2013.
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Chapter 07 - Accounting for Sales and Accounts Receivable
78. Selected balances from the general ledger of the Valley Video Rentals on May 31, 2013, are listed below. Use the appropriate data to prepare the Revenue section of the firm's income statement for the month ended May 31, 2013.
79. Selected balances from the general ledger of the Loren Company on March 31, 2013, are listed below. Use the appropriate data to prepare the Revenue section of the firm's income statement for the month ended March 31, 2013.
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Chapter 07 - Accounting for Sales and Accounts Receivable
80. The accounts receivable ledger for Acme Auto Parts is shown below. Prepare a schedule of accounts receivable as of March 31, 2013.
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Chapter 07 - Accounting for Sales and Accounts Receivable
81. A wholesale firm made sales with the following list prices and trade discounts. Calculate the amount the firm will use to record each sale in the sales journal. Show your calculation. A. List price of $900 and trade discount of 45 percent. B. List price of $500 and trade discount of 35 percent. C. List Price of $1,600 and trade discounts of 25 and 15 percent.
82. A wholesale firm made sales with the following list prices and trade discounts. Calculate the amount the firm will use to record each sale in the sales journal. Show your calculation. Round your answers to the nearest dollar. A. List price of $2,300 and trade discount of 40 percent. B. List price of $3,500 and trade discounts of 25 and 15 percent.
83. The balances of selected accounts of Casper Company on February 28, 2013, were as follows: Sales $200,000 and Sales Returns and Allowances $5,000. The firm's net sales are subject to an 8 percent sales tax. Record the payment of the sales tax payable on February 28, 2013 on page 8 of a general journal.
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Chapter 07 - Accounting for Sales and Accounts Receivable
Matching Questions
84. Match the accounting terms with the description by entering the proper number. 1. A journal used to record only one type of Accounts receivable transaction ledger ____ Contra revenue 2. A business that sells services account ____ 3. A system that allows the sale of services or goods with the understanding that payment will be made at Credit a later date memorandum ____ 4. A business that sells goods that it has produced Sales return ____ 5. An established retail price Subsidiary ledger ____ 6. A firm's acceptance of a return of goods from a customer Service business ____ 7. A listing of all balances of the accounts in the accounts receivable subsidiary ledger Net price ____ 8. A subsidiary ledger that contains credit customer Merchandise accounts inventory ____ Open-account 9. A business that sells goods purchased for resale credit ____ 10. The list price less all trade discounts Sales allowance ____ 11. A note verifying that a customer's account is being reduced by the amount of a sales return or sales allowance plus any sales tax that may have been involved List price ____ 12. A ledger dedicated to accounts of a single type and showing details to support a general ledger account Wholesale business ____ 13. A special journal used to record sales of merchandise on credit Trade discount ____ 14. The difference between the balance in the Sales account and the balance in the Sales Returns and Allowances account Net sales ____ 15. A reduction in the price originally charged to customers for goods or services Sales journal ____ 16. A business that manufactures or distributes goods to retail businesses or large consumers such as hotels and hospitals Control account ____ 17. A business that sells directly to individual consumers Invoice ____ 18. A reduction from list price Special journal ____ 19. An account that links a subsidiary ledger and the general ledger since its balance summarizes the Merchandising balances of the accounts in the subsidiary ledger business ____
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Chapter 07 - Accounting for Sales and Accounts Receivable
20. A customer billing for merchandise bought on credit 21. The stock of goods a merchandising business keeps on hand 22. An account with a debit balance, which is contrary to the normal balance for a revenue account 23. Sales made through the use of open-account credit or one of various types of credit cards
Retail business ____ Manufacturing business ____ Charge-account sales ____ Schedule of accounts receivable ____
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Chapter 07 - Accounting for Sales and Accounts Receivable
Chapter 07 Accounting for Sales and Accounts Receivable Answer Key
True / False Questions
1. A merchandising business sells goods that it produces. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 07-01 Record credit sales in a sales journal. Level: Easy Topic: Merchandise Sales
2. The individual amounts in the Accounts Receivable Debit column of a sales journal should be posted to the accounts receivable subsidiary ledger, and the column total should be posted to the Accounts Receivable account in the general ledger. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 07-02 Post from the sales journal to the general ledger accounts Learning Objective: 07-03 Post from the sales journal to the customers' accounts in the accounts receivable subsidiary ledger. Level: Easy Topic: Merchandise Sales Topic: Special Topics in Merchandising
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Chapter 07 - Accounting for Sales and Accounts Receivable
3. To indicate that the column totals of the sales journal have been posted, a check mark is entered under the column total. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 07-02 Post from the sales journal to the general ledger accounts Level: Medium Topic: Merchandise Sales
4. The abbreviation S1 in the Posting Reference column of an account shows that the data was posted from page 1 of the sales journal. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 07-02 Post from the sales journal to the general ledger accounts Level: Easy Topic: Merchandise Sales
5. The balance of a customer's account in the accounts receivable ledger is circled to show that it is a debit amount. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 07-03 Post from the sales journal to the customers' accounts in the accounts receivable subsidiary ledger. Level: Medium Topic: Accounts Receivable
6. The Sales Returns and Allowances account has a normal debit balance. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 07-04 Record sales returns and allowances in the general journal. Level: Easy Topic: Accounts Receivable
7-28 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
7. A customer who returns goods or receives an allowance is entitled to a credit for the appropriate amount of sales tax if tax was charged on the original sale. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 07-04 Record sales returns and allowances in the general journal. Level: Medium Topic: Accounts Receivable
8. A sales return or a sales allowance is usually recorded in the sales journal. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 07-04 Record sales returns and allowances in the general journal. Level: Medium Topic: Accounts Receivable
9. The balance of the Sales Returns and Allowances account is subtracted from the balance of the Accounts Receivable account in the Assets section of the balance sheet. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 07-05 Post sales returns and allowances. Level: Medium Topic: Accounts Receivable
10. After all postings have been made, the totals of the balances in the accounts receivable subsidiary ledger should equal the balance of the Accounts Receivable account in the general ledger. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Evaluate Learning Objective: 07-06 Prepare a schedule of accounts receivable. Level: Easy Topic: Accounts Receivable
7-29 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
11. In a small business, the customer accounts are usually kept in alphabetical order. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 07-06 Prepare a schedule of accounts receivable. Level: Medium Topic: Accounts Receivable
12. A wholesale business does not need a Sales Tax Payable account. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 07-07 Compute trade discounts. Level: Hard Topic: Special Topics in Merchandising
13. For a retailer, bank credit card sales are like cash sales. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 07-08 Record credit card sales in appropriate journals. Level: Easy Topic: Special Topics in Merchandising
14. When a business makes a sale on a bank credit card, the business is responsible for collecting from the customer. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 07-08 Record credit card sales in appropriate journals. Level: Easy Topic: Special Topics in Merchandising
7-30 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
15. In some states, a firm receives a discount for paying the amount of sales tax due on time. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 07-09 Prepare the state sales tax return. Level: Medium Topic: Special Topics in Merchandising
Fill in the Blank Questions
16. The source document for an entry in the sales journal is a(n) ____________________. sales slip
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 07-01 Record credit sales in a sales journal. Level: Easy Topic: Merchandise Sales
17. A(n) ____________________ business sells goods that it purchases in finished form for resale. merchandising
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 07-01 Record credit sales in a sales journal. Learning Objective: 07-10 Define the accounting terms new to this chapter. Level: Easy Topic: Merchandise Sales Topic: Special Topics in Merchandising
7-31 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
18. The entry to record a sale of merchandise on credit that is subject to sales tax includes a(n) ____________________ to Sales Tax Payable. credit
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 07-01 Record credit sales in a sales journal. Level: Easy Topic: Merchandise Sales
19. A business that sells goods and services directly to individual consumers is called a(n) ____________________ business. retail
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 07-01 Record credit sales in a sales journal. Learning Objective: 07-10 Define the accounting terms new to this chapter. Level: Easy Topic: Merchandise Sales Topic: Special Topics in Merchandising
20. The stock of goods kept on hand to sell to consumers is called _________________________. merchandise inventory
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 07-01 Record credit sales in a sales journal. Learning Objective: 07-10 Define the accounting terms new to this chapter. Level: Easy Topic: Merchandise Sales Topic: Special Topics in Merchandising
7-32 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
21. A(n) ____________________ journal is a journal that is used to record only one type of transaction. special
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 07-01 Record credit sales in a sales journal. Learning Objective: 07-10 Define the accounting terms new to this chapter. Level: Easy Topic: Merchandise Sales Topic: Special Topics in Merchandising
22. A ledger that contains accounts of a single type is called a(n) ____________________ ledger. subsidiary
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 07-01 Record credit sales in a sales journal. Learning Objective: 07-10 Define the accounting terms new to this chapter. Level: Easy Topic: Merchandise Sales Topic: Special Topics in Merchandising
23. Sales Tax Payable is classified as a(n) ____________________ account. liability
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 07-01 Record credit sales in a sales journal. Level: Easy Topic: Merchandise Sales
7-33 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
24. To indicate that an amount has been posted from the sales journal to the accounts receivable subsidiary ledger, a(n) ____________________ is placed in the Posting Reference column of the journal. check mark
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 07-03 Post from the sales journal to the customers' accounts in the accounts receivable subsidiary ledger. Level: Easy Topic: Accounts Receivable
25. The ____________________ ledger contains accounts for credit customers. accounts receivable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 07-03 Post from the sales journal to the customers' accounts in the accounts receivable subsidiary ledger. Learning Objective: 07-10 Define the accounting terms new to this chapter. Level: Easy Topic: Merchandise Sales Topic: Special Topics in Merchandising
26. The Sales Returns and Allowances account has a normal ____________________ balance. debit
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 07-04 Record sales returns and allowances in the general journal. Level: Easy Topic: Accounts Receivable
7-34 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
27. A(n) ____________________ is a business form that is issued to a credit customer upon acceptance of the return of damaged goods. credit memorandum
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 07-04 Record sales returns and allowances in the general journal. Learning Objective: 07-10 Define the accounting terms new to this chapter. Level: Easy Topic: Merchandise Sales Topic: Special Topics in Merchandising
28. A list of all unpaid balances in the accounts receivable subsidiary ledger is called a(n) ____________________ of accounts receivable. schedule
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 07-06 Prepare a schedule of accounts receivable. Learning Objective: 07-10 Define the accounting terms new to this chapter. Level: Easy Topic: Merchandise Sales Topic: Special Topics in Merchandising
29. When an accounts receivable subsidiary ledger is used, the Accounts Receivable account in the general ledger is considered to be a(n) ____________________ account. control
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 07-06 Prepare a schedule of accounts receivable. Level: Easy Topic: Accounts Receivable
7-35 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
30. The reductions from list prices that many wholesale businesses offer their customers are called ____________________ discounts. trade
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 07-07 Compute trade discounts. Learning Objective: 07-10 Define the accounting terms new to this chapter. Level: Easy Topic: Special Topics in Merchandising
Multiple Choice Questions
31. In a firm that uses special journals, a sale of merchandise on credit is recorded in the A. cash payments journal. B. cash receipts journal. C. sales journal. D. purchases journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 07-01 Record credit sales in a sales journal. Level: Easy Topic: Merchandise Sales
32. In a firm that uses special journals, the acceptance of a return of merchandise from a credit customer is recorded in the A. cash receipts journal. B. sales journal. C. cash payments journal. D. general journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 07-01 Record credit sales in a sales journal. Level: Medium Topic: Merchandise Sales
7-36 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
33. In a firm that uses special journals, the sale of merchandise for cash is recorded in the A. cash payments journal. B. cash receipts journal. C. sales journal. D. purchases journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 07-01 Record credit sales in a sales journal. Level: Easy Topic: Merchandise Sales
34. In a firm that uses special journals, the purchase of merchandise on credit is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 07-01 Record credit sales in a sales journal. Level: Easy Topic: Merchandise Sales
35. In a firm that uses special journals, an allowance given for damaged merchandise is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 07-01 Record credit sales in a sales journal. Level: Medium Topic: Merchandise Sales
7-37 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
36. In a firm that uses special journals, the collection of sums on account from credit customers is recorded in the A. cash payments journal. B. cash receipts journal. C. sales journal. D. purchases journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 07-01 Record credit sales in a sales journal. Level: Easy Topic: Merchandise Sales
37. In a firm that uses special journals, an additional cash investment received from the owner is recorded in the A. cash receipts journal. B. sales journal. C. cash payments journal. D. general journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 07-01 Record credit sales in a sales journal. Level: Easy Topic: Merchandise Sales
38. In a firm that uses special journals, the issuance of a check to pay a creditor on account is recorded in the A. cash payments journal. B. cash receipts journal. C. sales journal. D. purchases journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 07-01 Record credit sales in a sales journal. Level: Easy Topic: Merchandise Sales
7-38 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
39. The Sales account is classified as A. a liability account. B. an asset account. C. a contra account. D. a revenue account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 07-01 Record credit sales in a sales journal. Level: Easy Topic: Merchandise Sales
40. A firm that sells goods that it purchases for re-sale is a A. service business. B. merchandising business. C. manufacturing business. D. non-profit business.
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 07-01 Record credit sales in a sales journal. Level: Easy Topic: Merchandise Sales
41. Merchandise is sold on credit for $600 plus 5 percent sales tax. The entry in the sales journal will include a debit to Accounts Receivable for A. $600.00. B. $603.50. C. $605.50. D. $630.00.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 07-01 Record credit sales in a sales journal. Level: Medium Topic: Merchandise Sales
7-39 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
42. In a sales journal used to record taxable sales, the total of the Accounts Receivable column should equal A. the sum of the totals of the Sales Tax Payable column and the Sales column. B. the difference between the total of the Sales Tax Payable column and the total of the Sales column. C. the total of the Sales column. D. the total of the Sales Tax Payable column.
AACSB: Analytic AICPA FN: Reporting Bloom's: Evaluate Learning Objective: 07-01 Record credit sales in a sales journal. Level: Medium Topic: Merchandise Sales
43. Which of the following statements is correct? A. The sales journal is used for recording both cash sales and credit sales. B. Since the sales journal is used for a single purpose, there is no need to enter any descriptions. C. To provide an adequate audit trail, sales on credit should be recorded in both the sales journal and the general journal. D. The complete information for each sale of merchandise on credit can be recorded on one line of the cash receipts journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 07-01 Record credit sales in a sales journal. Level: Medium Topic: Merchandise Sales
7-40 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
44. Which of the following statements is not correct? A. Use of a sales journal eliminates repetition in posting individual entries to the Accounts Receivable account in the general ledger. B. A journal that is used to record only one type of a transaction is called a special journal. C. The sales slip is the source document for sales on credit transactions. D. If the firm must collect sales tax on retail transactions, the sales journal should have a Sales Tax Payable Debit column.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 07-01 Record credit sales in a sales journal. Learning Objective: 07-02 Post from the sales journal to the general ledger accounts Level: Medium Topic: Merchandise Sales Topic: Special Topics in Merchandising
45. Which of the following statements is not correct? A. Postings to the accounts receivable subsidiary ledger are usually made once a month on the last day of the month. B. Before any posting to the subsidiary ledger takes place, the equality of the debits and credits recorded in the sales journal are proved by comparing the column totals. C. Before any posting to the general ledger takes place, the equality of the debits and credits recorded in the sales journal are proved by comparing the column totals. D. When special journals are used, postings to the accounts receivable account in the general ledger are usually made once a month on the last day of the month.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 07-02 Post from the sales journal to the general ledger accounts Learning Objective: 07-03 Post from the sales journal to the customers' accounts in the accounts receivable subsidiary ledger. Level: Medium Topic: Merchandise Sales Topic: Special Topics in Merchandising
7-41 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
46. To find the balance due from an individual customer, the accountant would refer to A. the sales journal. B. the Sales account in the general ledger. C. the accounts receivable subsidiary ledger. D. the Accounts Receivable account in the general ledger.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 07-03 Post from the sales journal to the customers' accounts in the accounts receivable subsidiary ledger. Level: Easy Topic: Accounts Receivable
47. The entry to record a return by a credit customer of defective merchandise on which no sales tax was charged includes A. a debit to Sales and a credit to Accounts Receivable. B. a debit to Sales and a credit to Sales Returns and Allowances. C. a debit to Sales Returns and Allowances and a credit to Accounts Receivable. D. a debit to Accounts Receivable and a credit to Sales Returns and Allowances.
AACSB: Analytic AICPA FN: Reporting Bloom's: Analyze Learning Objective: 07-04 Record sales returns and allowances in the general journal. Level: Medium Topic: Accounts Receivable
48. If a firm does not have a sales returns and allowances journal, the entries for these transactions are made in A. the sales journal. B. the general journal. C. the cash receipts journal. D. the cash payments journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 07-04 Record sales returns and allowances in the general journal. Level: Medium Topic: Accounts Receivable
7-42 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
49. The Sales Returns and Allowances account is classified as A. an asset account. B. a contra asset account. C. an expense account. D. a contra revenue account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 07-04 Record sales returns and allowances in the general journal. Level: Easy Topic: Accounts Receivable
50. The Sales Returns and Allowances account is presented A. on the balance sheet as a deduction from Accounts Receivable. B. on the income statement as a deduction from Sales. C. on the income statement as an addition to Sales. D. on the balance sheet as a deduction from Capital.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 07-05 Post sales returns and allowances. Level: Medium Topic: Accounts Receivable
51. If a firm had sales of $50,000 during a period and sales returns and allowances of $4,000, its net sales were A. $54,000. B. $50,000. C. $46,000. D. $4,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 07-05 Post sales returns and allowances. Level: Easy Topic: Accounts Receivable
7-43 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
52. After all postings have been made, the total of the schedule of accounts receivable should equal A. the balance of the Sales account. B. the total of the Accounts Receivable Debit column in the sales journal. C. the balance of the Accounts Receivable account in the general ledger. D. the total of all sales on account for the accounting period.
AACSB: Analytic AICPA FN: Reporting Bloom's: Evaluate Learning Objective: 07-06 Prepare a schedule of accounts receivable. Level: Medium Topic: Accounts Receivable
53. A wholesale business sells goods with a list price of $900 and a trade discount of 40 percent. The net price is A. $360.00. B. $540.00. C. $900.00. D. $940.00.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 07-07 Compute trade discounts. Level: Easy Topic: Special Topics in Merchandising
54. The amount used by wholesalers to record sales in its sales journal is A. the retail price. B. the list price. C. the net price. D. the original price.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 07-07 Compute trade discounts. Level: Easy Topic: Special Topics in Merchandising
7-44 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
55. A retailer recorded the following in June: cash sales $2,000; credit sales, $9,000; sales returns and allowances, $1,000. Assuming the sales tax rate is 7 percent, the entry to record the sales tax payment includes a debit to Sales Tax Payable for A. $560. B. $630. C. $700. D. $770.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 07-09 Prepare the state sales tax return. Level: Medium Topic: Special Topics in Merchandising
56. On Deck Sports Memorabilia store sells a Babe Ruth rookie card for $4,600 on account. If the sales tax on the sale is 8%, what is the amount debited to Accounts Receivable? A. $4,232 B. $4,968 C. $4,600 D. $4,592
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 07-09 Prepare the state sales tax return. Level: Easy Topic: Special Topics in Merchandising
57. Which of the following describes Sales Tax Payable? A. A revenue account with a normal credit balance. B. A liability account with a normal debit balance. C. A liability account with a normal credit balance. D. An asset account with a normal debit balance.
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 07-09 Prepare the state sales tax return. Level: Easy Topic: Special Topics in Merchandising
7-45 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
58. Hugh Snow returned merchandise to Farley Co. The entry on the books of Farley company to record the return of merchandise from Hugh Snow would include a: A. Debit Accounts Payable B. Credit to Purchase Returns and Allowances C. Debit to Account Receivable D. Debit Sales Returns and Allowances
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 07-05 Post sales returns and allowances. Level: Easy Topic: Accounts Receivable
59. On the Income Statement, Sales Returns and Allowances have the effect of A. Increasing total revenue B. Increasing total expenses C. Decreasing total revenue D. Decreasing total expenses
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 07-04 Record sales returns and allowances in the general journal. Level: Easy Topic: Accounts Receivable
60. An example of a merchandising company is a A. bookstore B. restaurant C. hair salon D. real estate office
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 07-01 Record credit sales in a sales journal. Level: Easy Topic: Merchandise Sales
7-46 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
61. Hour Place Clock Shop sold a grandfather clock for $2,250 subject to a 9% sales tax. The entry in the sales journal will include a debit to Accounts Receivable for A. $2,250.00 B. $2,092.50 C. $2,452.50 D. $2,362.00
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 07-09 Prepare the state sales tax return. Level: Easy Topic: Special Topics in Merchandising
62. Hour Place Clock Shop sold a grandfather clock for $2,250 subject to a 9% sales tax. The entry in the sales journal will include a credit to Sales for A. $2,250.00 B. $2,092.50 C. $2,452.50 D. $2,362.00
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 07-09 Prepare the state sales tax return. Level: Easy Topic: Special Topics in Merchandising
63. Which of the following describes Sales Returns and Allowances? A. A revenue account with a normal credit balance. B. An expense account with a normal debit balance. C. A contra revenue account with a normal debit balance. D. A contra expense account with a normal credit balance.
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 07-04 Record sales returns and allowances in the general journal. Level: Easy Topic: Accounts Receivable
7-47 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
64. The amount of the trade discount taken by the customer is recorded as a(n) A. asset. B. liability. C. expense. D. sales recorded net of trade discounts.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 07-07 Compute trade discounts. Level: Easy Topic: Special Topics in Merchandising
65. Kay Sadia sold merchandise for $8,750 subject to a 6% sales tax. The entry in the sales journal will include a debit to Accounts Receivable for A. $9,275.00 B. $8,225.00 C. $8,750.00 D. $8,462.00
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 07-09 Prepare the state sales tax return. Level: Easy Topic: Special Topics in Merchandising
7-48 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
Short Answer Questions
66. For each of the transactions listed below, identify the journal that should be used to record the transaction. Use CR for cash receipts journal, CP for cash payments journal, S for sales journal, P for purchases journal, and G for general journal. A. Accepted a return of merchandise from a credit customer B. Collected sums on account from credit customers C. Gave an allowance for damaged merchandise D. Purchased merchandise on credit E. Received an additional cash investment from the owner F. Sold merchandise for cash G. Sold merchandise on credit H. Issued a check to pay a creditor on account (A) G, (B) CR, (C) G, (D) P, (E) CR, (F) CR, (G) S, (H) CP
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 07-01 Record credit sales in a sales journal. Level: Medium Topic: Merchandise Sales
7-49 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
67. Read the description of following transactions that are required during the accounting period for Drummond Consulting Services. Determine the account to be debited and the account to be credited. A. Sold merchandise on credit. The transaction involved sales tax. B. Accepted a return of merchandise from a credit customer. The original sale involved sales tax. C. Received a check from a credit customer on account. D. Sold merchandise on credit. The transaction did not involve sales tax. E. Gave an allowance to a credit customer for damaged merchandise. The original sale involved sales tax. A. Debit Accounts Receivable; credit Sales and Sales Tax Payable B. Debit Sales Returns and Allowances and Sales Tax Payable; credit Accounts Receivable C. Debit Cash; credit Accounts Receivable D. Debit Accounts Receivable; credit Sales E. Debit Sales Returns and Allowances and Sales Tax Payable; credit Accounts Receivable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 07-01 Record credit sales in a sales journal. Level: Medium Topic: Merchandise Sales
7-50 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
68. Read the description of following transactions that are required during the accounting period for Mario's Electronics. Determine the account and amount to be debited and the account and amount to be credited. A. Gave a $300 allowance to a credit customer for damaged merchandise. The original sale involved a 10 percent sales tax. B. Accepted a return of $150 in merchandise from a credit customer. The original sale involved 5 percent sales tax. C. Sold $200 in merchandise for cash. The transaction involved 8 percent sales tax. D. Received a check for $50 from a credit customer on account. E. Sold $1,200 in merchandise on credit. The transaction did not involve sales tax. A. Debit Sales Returns and Allowances $300, debit Sales Tax Payable $30; credit Accounts Receivable $330 B. Debit Sales Returns and Allowances $150, debit Sales Tax Payable $7.50; credit Accounts Receivable $157.50 C. Debit Cash $216; credit Sales $200 and credit Sales Tax Payable $16 D. Debit Cash $50; credit Accounts Receivable $50 E. Debit Accounts Receivable $1,200; credit Sales $1,200
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 07-01 Record credit sales in a sales journal. Level: Medium Topic: Merchandise Sales
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Chapter 07 - Accounting for Sales and Accounts Receivable
69. The sales journal for Carothers Company is shown below. Describe how the amounts would be posted to the general ledger accounts.
Dr. Accounts Receivable $2,889; Cr. Sales Tax Payable $189; Cr. Sales $2,700
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 07-02 Post from the sales journal to the general ledger accounts Level: Medium Topic: Merchandise Sales
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Chapter 07 - Accounting for Sales and Accounts Receivable
70. The sales journal for Simon Company is shown below. Describe how the amounts would be posted to the accounts receivable subsidiary ledger accounts.
Dr. Jane Doe $3,424; Dr. Sue Smith $1,926; Dr. Tom Tone $428
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 07-02 Post from the sales journal to the general ledger accounts Level: Medium Topic: Accounts Receivable
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Chapter 07 - Accounting for Sales and Accounts Receivable
71. Bradley's Appliance Store had the following transactions during the month of May 2013. Record the transactions on page 5 of a sales journal and page 8 of a general journal. Total, prove, and rule the sales journal as of May 31.
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Chapter 07 - Accounting for Sales and Accounts Receivable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 07-01 Record credit sales in a sales journal. Learning Objective: 07-04 Record sales returns and allowances in the general journal. Level: Medium Topic: Merchandise Sales Topic: Special Topics in Merchandising
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Chapter 07 - Accounting for Sales and Accounts Receivable
72. Barnett's Electronics Store had the following transactions during the month of January 2013. Record the transactions on page 1 of a sales journal and page 1 of a general journal. Total, prove, and rule the sales journal as of January 31.
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Chapter 07 - Accounting for Sales and Accounts Receivable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 07-01 Record credit sales in a sales journal. Learning Objective: 07-04 Record sales returns and allowances in the general journal. Level: Medium Topic: Merchandise Sales Topic: Special Topics in Merchandising
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Chapter 07 - Accounting for Sales and Accounts Receivable
73. All That Jazz Music Store had the following transactions during the month of August 2013. Record the transactions on page 15 of a sales journal and page 18 of a general journal. Total, prove, and rule the sales journal as of August 31.
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Chapter 07 - Accounting for Sales and Accounts Receivable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 07-01 Record credit sales in a sales journal. Learning Objective: 07-04 Record sales returns and allowances in the general journal. Level: Medium Topic: Merchandise Sales Topic: Special Topics in Merchandising
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Chapter 07 - Accounting for Sales and Accounts Receivable
74. One of the customer accounts from the accounts receivable ledger for Paragon Consulting Services is shown below. Explain each of the entries that have been posted to this customer's subsidiary ledger account.
Mar. 12 - Sold merchandise in the amount of $250 on credit using sales slip 301. Mar. 15 - Collected $1,500 of cash on account. Mar. 28 - Sales return or allowance in the amount of $50 issued using CM 105.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 07-03 Post from the sales journal to the customers' accounts in the accounts receivable subsidiary ledger. Learning Objective: 07-04 Record sales returns and allowances in the general journal. Level: Medium Topic: Accounts Receivable
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Chapter 07 - Accounting for Sales and Accounts Receivable
75. One of the customer accounts from the accounts receivable ledger for Rogers Flooring is shown below. Explain each of the entries that have been posted to this customer's subsidiary ledger account.
Sept. 8 - Sales return or allowance in the amount of $500 issued using CM 406. Sept. 10 - Sold merchandise in the amount of $250 on credit using sales slip 1001. Sept. 16 - Collected $6,250 cash on account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 07-03 Post from the sales journal to the customers' accounts in the accounts receivable subsidiary ledger. Learning Objective: 07-04 Record sales returns and allowances in the general journal. Level: Medium Topic: Accounts Receivable
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Chapter 07 - Accounting for Sales and Accounts Receivable
76. One of the customer accounts from the accounts receivable ledger for Toulouse Company is shown below. Explain each of the entries that have been posted to this customer's subsidiary ledger account.
June 3 - Sold merchandise in the amount of $2,000 on credit using sales slip 1307. June 15 - Sales return or allowance in the amount of $100 issued using CM 202. June 20 - Collected $1,500 cash on account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 07-03 Post from the sales journal to the customers' accounts in the accounts receivable subsidiary ledger. Learning Objective: 07-04 Record sales returns and allowances in the general journal. Level: Medium Topic: Accounts Receivable
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Chapter 07 - Accounting for Sales and Accounts Receivable
77. Selected balances from the general ledger of the All Star Video Rentals on July 31, 2013, are listed below. Use the appropriate data to prepare the Revenue section of the firm's income statement for the month ended July 31, 2013.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 07-05 Post sales returns and allowances. Level: Easy Topic: Accounts Receivable
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Chapter 07 - Accounting for Sales and Accounts Receivable
78. Selected balances from the general ledger of the Valley Video Rentals on May 31, 2013, are listed below. Use the appropriate data to prepare the Revenue section of the firm's income statement for the month ended May 31, 2013.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 07-05 Post sales returns and allowances. Level: Easy Topic: Accounts Receivable
7-64 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
79. Selected balances from the general ledger of the Loren Company on March 31, 2013, are listed below. Use the appropriate data to prepare the Revenue section of the firm's income statement for the month ended March 31, 2013.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 07-05 Post sales returns and allowances. Level: Easy Topic: Accounts Receivable
7-65 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
80. The accounts receivable ledger for Acme Auto Parts is shown below. Prepare a schedule of accounts receivable as of March 31, 2013.
7-66 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 07-06 Prepare a schedule of accounts receivable. Level: Medium Topic: Accounts Receivable
81. A wholesale firm made sales with the following list prices and trade discounts. Calculate the amount the firm will use to record each sale in the sales journal. Show your calculation. A. List price of $900 and trade discount of 45 percent. B. List price of $500 and trade discount of 35 percent. C. List Price of $1,600 and trade discounts of 25 and 15 percent. A. $900 - $405 = $495 B. $500 - $175 = $325 C. $1,600 - $400.00 = $1,200.00 - $180 = $1,020
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 07-07 Compute trade discounts. Level: Medium Topic: Special Topics in Merchandising
82. A wholesale firm made sales with the following list prices and trade discounts. Calculate the amount the firm will use to record each sale in the sales journal. Show your calculation. Round your answers to the nearest dollar. A. List price of $2,300 and trade discount of 40 percent. B. List price of $3,500 and trade discounts of 25 and 15 percent. A. $2,300 - $920 = $1,380 B. $3,500 - $875 = $2,625 - $394 = $2,231
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 07-07 Compute trade discounts. Level: Medium Topic: Special Topics in Merchandising
7-67 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
83. The balances of selected accounts of Casper Company on February 28, 2013, were as follows: Sales $200,000 and Sales Returns and Allowances $5,000. The firm's net sales are subject to an 8 percent sales tax. Record the payment of the sales tax payable on February 28, 2013 on page 8 of a general journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 07-09 Prepare the state sales tax return. Level: Medium Topic: Special Topics in Merchandising
7-68 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 07 - Accounting for Sales and Accounts Receivable
Matching Questions
84. Match the accounting terms with the description by entering the proper number. 1. A journal used to record only one type of Accounts receivable transaction ledger 8 Contra revenue 2. A business that sells services account 22 3. A system that allows the sale of services or goods with the understanding that payment will be made at a Credit later date memorandum 11 4. A business that sells goods that it has produced Sales return 6 5. An established retail price Subsidiary ledger 12 6. A firm's acceptance of a return of goods from a customer Service business 2 7. A listing of all balances of the accounts in the accounts receivable subsidiary ledger Net price 10 8. A subsidiary ledger that contains credit customer Merchandise accounts inventory 21 Open-account 9. A business that sells goods purchased for resale credit 3 10. The list price less all trade discounts Sales allowance 15 11. A note verifying that a customer's account is being reduced by the amount of a sales return or sales allowance plus any sales tax that may have been involved List price 5 12. A ledger dedicated to accounts of a single type and showing details to support a general ledger account Wholesale business 16 13. A special journal used to record sales of merchandise on credit Trade discount 18 14. The difference between the balance in the Sales account and the balance in the Sales Returns and Allowances account Net sales 14 15. A reduction in the price originally charged to customers for goods or services Sales journal 13 16. A business that manufactures or distributes goods to retail businesses or large consumers such as hotels and hospitals Control account 19 17. A business that sells directly to individual consumers Invoice 20 18. A reduction from list price Special journal 1 19. An account that links a subsidiary ledger and the general ledger since its balance summarizes the Merchandising balances of the accounts in the subsidiary ledger business 9
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Chapter 07 - Accounting for Sales and Accounts Receivable
20. A customer billing for merchandise bought on credit 21. The stock of goods a merchandising business keeps on hand 22. An account with a debit balance, which is contrary to the normal balance for a revenue account 23. Sales made through the use of open-account credit or one of various types of credit cards
Retail business 17 Manufacturing business 4 Charge-account sales 23 Schedule of accounts receivable 7
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 07-01 Record credit sales in a sales journal. Learning Objective: 07-02 Post from the sales journal to the general ledger accounts Learning Objective: 07-03 Post from the sales journal to the customers' accounts in the accounts receivable subsidiary ledger. Learning Objective: 07-04 Record sales returns and allowances in the general journal. Learning Objective: 07-05 Post sales returns and allowances. Learning Objective: 07-06 Prepare a schedule of accounts receivable. Learning Objective: 07-07 Compute trade discounts. Learning Objective: 07-08 Record credit card sales in appropriate journals. Learning Objective: 07-09 Prepare the state sales tax return. Learning Objective: 07-10 Define the accounting terms new to this chapter. Level: Medium Topic: Merchandise Sales Topic: Special Topics in Merchandising
7-70 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
Chapter 08 Accounting for Purchases and Accounts Payable True / False Questions
1. The use of a purchases journal strengthens the audit trail. True False
2. Individual amounts in the purchases journal are posted to the general ledger during the month. True False
3. The supplier's invoice is the source document for a purchase on credit transaction. True False
4. To show that the totals of the amount columns in the purchases journal were posted, the appropriate account numbers are written in parentheses below the totals. True False
5. The abbreviation P1 in the Posting Reference column of an account indicates that the data was posted from page 1 of the cash payments journal. True False
6. The amount of a check issued to a creditor is posted from the cash payments journal to the debit column of the creditor's account in the accounts payable subsidiary ledger. True False
7. When an accounts payable subsidiary ledger is used, the entry to Accounts Payable requires two posting references in the general journal. True False
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Chapter 08 - Accounting for Purchases and Accounts Payable
8. A firm's accounts payable ledger may include accounts for creditors who are not suppliers of merchandise. True False
9. A balance that is circled in the accounts payable ledger is a credit balance. True False
10. No amounts are posted from the purchases journal to the accounts payable subsidiary ledger during the month. True False
11. The entry to record the return of merchandise purchased on credit includes a debit to Accounts Payable and a credit to Purchases Returns and Allowances. True False
12. If an amount recorded in the general journal requires two postings, a diagonal line is used to separate the two posting references in the posting reference column. True False
13. The Purchases Returns and Allowances account has a normal debit balance. True False
14. Freight In and Purchases Returns and Allowances are deducted from Purchases to determine the net delivered cost of purchases. True False
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Chapter 08 - Accounting for Purchases and Accounts Payable
15. If a business uses pre numbered purchase orders, it is not necessary to account for every purchase order. True False
16. A purchase of supplies on account should be recorded in the purchases journal. True False
17. At the end of the accounting period the total of the accounts in the accounts payable subsidiary ledgers need not agree to the total in the firm's accounts payable ledger account. True False
Fill in the Blank Questions
18. Whenever a sales department needs goods, it sends the purchasing department a form called a(n) ____________________. ________________________________________
19. The discounts that are offered by suppliers to encourage quick payment of invoices by customers are known as ____________________ discounts. ________________________________________
20. The Freight In account should have a(n) ____________________ balance. ________________________________________
21. Purchases of merchandise on credit should be recorded in the ____________________ journal. ________________________________________
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Chapter 08 - Accounting for Purchases and Accounts Payable
22. The form sent to the supplier to order goods is called a(n) ____________________. ________________________________________
23. Since they are liability accounts, creditor's accounts in the accounts payable ledger normally have ____________________ balances. ________________________________________
24. Purchases returns and allowances are recorded in the ____________________ journal if a firm does not have a purchases returns and allowances journal. ________________________________________
25. An allowance received from a creditor is posted to the ____________________ column of the creditor's account. ________________________________________
26. The entry to record a return of merchandise purchased on credit includes a debit to the ____________________ account in the general ledger. ________________________________________
27. After damaged goods are returned, the supplier issues a(n) ____________________ memorandum. ________________________________________
28. The Purchases Returns and Allowances account is a(n) ____________________ cost of goods sold account. ________________________________________
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Chapter 08 - Accounting for Purchases and Accounts Payable
29. A list of creditors and the balances owed to them is called a schedule of ____________________. ________________________________________
30. When an accounts payable ledger is used, the Accounts Payable account in the general ledger becomes a(n) ____________________ account. ________________________________________
31. In a small firm, the creditor accounts are placed in ____________________ order in the accounts payable ledger. ________________________________________
32. Good internal control requires a ____________________ of duties. ________________________________________
Multiple Choice Questions
33. Which of the following statements is not correct? A. Cash purchases of merchandise are not recorded in the purchases journal. B. A credit purchase of equipment for use in the business would be recorded in the purchases journal. C. The Purchases account has a normal debit balance. D. The invoice date and credit terms must be carefully recorded in the purchases journal because they determine when payment is due.
34. Which of the following statements is correct? A. The purchase requisition is the form sent to a supplier to order goods. B. The Purchases account is reported as an asset on the balance sheet. C. To the customer, a supplier's invoice is a purchase order invoice. D. The credit terms, 2/10, n/30, allow the customer to take a 2 percent discount if payment is made within 10 days of the invoice, otherwise payment is due in full in 30 days.
8-5 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
35. After a supplier of merchandise is selected, the purchasing department issues a form called A. a purchase invoice. B. a purchase order. C. a sale invoice. D. a purchase requisition.
36. The entry to record a purchase of merchandise on credit includes A. a debit to Purchases and a credit to Accounts Receivable. B. a credit to Purchases and a credit to Accounts Payable. C. a debit to Accounts Payable and a credit to Purchases. D. a debit to Purchases and a credit to Accounts Payable.
37. Freight charges on merchandise purchases should be debited to A. the Purchases account. B. the Accounts Payable account. C. the Freight In account. D. the creditor's account in the subsidiary ledger.
38. The Purchases account is A. a permanent account. B. a temporary account. C. a subsidiary account. D. a liability account.
39. Purchases of merchandise on credit should be recorded in A. the purchases journal. B. the general journal. C. the cash payments journal. D. the sales journal.
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Chapter 08 - Accounting for Purchases and Accounts Payable
40. The source document for recording a purchase of merchandise on credit is A. the purchase order. B. the purchase invoice. C. the receiving report. D. the purchase requisition.
41. Credit purchases of supplies that are to be used in the business are entered in A. the purchases journal. B. the general journal. C. the cash payments journal. D. the cash receipts journal.
42. When the sales department needs goods, it sends the purchasing department a form called A. a purchase invoice. B. a purchase order. C. a purchase requisition. D. a sales invoice.
43. In a firm that uses special journals, the purchase of merchandise with terms of 2/10, n/30 is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
44. In a firm that uses special journals, the return of damaged merchandise to a supplier and receipt of a credit memorandum is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
8-7 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
45. In a firm that uses special journals, the issuance of a check to a supplier as a payment on account is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
46. In a firm that uses special journals, the purchase of merchandise for $2,800, payable in 30 days, plus a freight charge of $140 is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
47. In a firm that uses special journals, the receipt of a credit memorandum from a supplier for merchandise that was damaged but can be sold at a reduced price is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
48. In a firm that uses special journals, the purchase of merchandise for cash is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
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Chapter 08 - Accounting for Purchases and Accounts Payable
49. Credit terms of 1/10, n/30 mean that A. payment in full is due 10 days after date of the invoice. B. a 1% discount may be taken for up to 30 days. C. if the invoice is paid within 10 days of its date, a 1% discount may be taken; otherwise the total amount is due in 20 days. D. if the invoice is paid within 10 days of its date, a 1% discount may be taken; otherwise the total amount is due in 30 days.
50. Check marks next to the individual amounts in the purchases journal mean that the amounts A. have been posted to the general ledger. B. have been posted to the accounts payable subsidiary ledger. C. have been posted to the accounts receivable subsidiary ledger. D. do not need to be posted to any account.
51. Postings to the accounts payable ledger should be made A. daily. B. weekly. C. monthly. D. at the end of the fiscal period.
52. A creditor's account in the accounts payable ledger has a $1,600 beginning balance. After a transaction for $700 is posted from the purchases journal, the balance of the creditor's account is A. $2,300 debit. B. $900 credit. C. $2,300 credit. D. $900 debit.
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Chapter 08 - Accounting for Purchases and Accounts Payable
53. To record a return of merchandise purchased on credit on the books of the buyer, the accountant would A. debit Purchases Returns and Allowances and credit Accounts Receivable. B. debit Purchases Returns and Allowances and credit Purchases. C. debit Accounts Payable and credit Purchases Returns and Allowances. D. debit Purchases and credit Purchases Returns and Allowances.
54. The total of the balances in the individual creditor's accounts should agree with the balance of A. the Purchases account in the general ledger. B. the Accounts Receivable account in the general ledger. C. the Accounts Payable account in the general ledger. D. the Sales account in the general ledger.
55. Which of the following statements is correct? A. Freight In is subtracted from Purchases to arrive at delivered cost of purchases. B. Another name that may be used for the Freight In account is "Transportation In." C. Freight charges that are listed on the invoice received from a supplier are not part of the total credit to Accounts Payable to record the credit purchase. D. The Freight In account is subtracted from Sales to get Net Sales.
56. The amount of the purchases for a period is presented in A. the Liabilities section of the balance sheet. B. the Revenue section of the income statement. C. the Cost of Goods Sold section of the income statement. D. the Expenses section of the income statement.
57. A firm had purchases of $16,200, freight charges of $300, and purchases returns and allowances of $1,100 during one month. Its net delivered cost of purchases was A. $14,800. B. $17,600. C. $16,200. D. $15,400.
8-10 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
58. Hugh Snow returned merchandise to Farley Co. The entry on Hugh Snow's books to record the return of merchandise to Farley Co. would include a: A. Debit Accounts Payable B. Credit to Purchase Returns and Allowances C. Debit to Account Receivable D. Debit Sales Returns and Allowances
59. The journal entry to record the purchase on account of $900 of merchandise with freight of $65 prepaid and added to the invoice is: A. debit Purchases $965; credit Accounts Payable $965 B. debit Accounts Payable $965, debit Freight in $65; credit Purchases $900 C. debit Purchases $900, debit Freight In $65; credit Accounts Payable $965 D. debit Accounts Receivable $965; credit Sales $965
60. The journal entry to record the purchase of merchandise on account for $2,750 with freight of $125 prepaid and added to the invoice is: A. debit Purchases $2,750; credit Accounts Payable $2,750 B. debit Accounts Payable $2,875, debit Freight in $125; credit Purchases $2,750 C. debit Purchases $2,750, debit Freight In $125; credit Accounts Payable $2,875 D. debit Accounts Receivable $2,875; credit Sales $2,875
61. Tune Tones Instrument Tuning Company owes Mandy Lynn's Music Studio $4,856 as of November 1. During November Tune Tones purchased merchandise from Mandy Lynn totaling $8,495 and made payments on account to Mandy Lynn in the amount of $7,250. The amount Tune Tones owes Mandy Lynn on November 30 is: A. $6,101 B. $3,611 C. $10,889 D. $7,250
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Chapter 08 - Accounting for Purchases and Accounts Payable
62. A creditor's account in the accounts payable ledger has a balance of $10,560 as of April 1. After a transaction of $12,800 is posted from the purchases journal and a transaction of $9,200 is posted from the cash payments journal, the balance of the creditor's account on April 30 is: A. $9,200 debit B. $6,960 credit C. $14,160 credit D. $12,800 debit
63. If a business pays $1,100 on account to a creditor, the effect of the payment is a decrease to cash and a A. decrease to Fees Income B. increase of capital C. increase to accounts receivable D. decrease to accounts payable
64. Which of the following accounts has a normal debit balance? A. Purchases B. Purchase Returns C. Accounts Payable D. Sales
65. During March a firm purchased $22,650 of merchandise and paid freight charges of $1,720. If the net delivered cost of purchases for the March is $21,900, what is the total purchase returns for March? A. $0 B. $2,470 C. $970 D. $3,440
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Chapter 08 - Accounting for Purchases and Accounts Payable
Essay Questions
66. For each of the transactions listed below, identify the journal that should be used to record the transaction. Use CR for cash receipts journal, CP for cash payments journal, S for sales journal, P for purchases journal, and G for general journal.
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Chapter 08 - Accounting for Purchases and Accounts Payable
67. For each of the transactions listed below, identify the journal that should be used to record the transaction. Use CR for cash receipts journal, CP for cash payments journal, S for sales journal, P for purchases journal, and G for general journal.
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Chapter 08 - Accounting for Purchases and Accounts Payable
68. Match the accounting terms with the description by entering the proper letter in the space provided.
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Chapter 08 - Accounting for Purchases and Accounts Payable
69. Match the accounting terms with the description by entering the proper letter in the space provided.
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Chapter 08 - Accounting for Purchases and Accounts Payable
Short Answer Questions
70. Explain each of the following credit terms. A) n/30 B) n/10 EOM C) 2/10, n/30 D) 1/10, n/20 E) 3/5, n/30
71. Read the description of the following transactions that are recorded during the accounting period for Drummond Consulting Services. Determine the account to be debited and the account to be credited. A) Purchased merchandise with terms of net 30 days. B) Returned some damaged merchandise to a supplier and received a credit memorandum. C) Issued a check to a supplier as a payment on account. D) Received an allowance for some merchandise that was slightly damaged but can be sold at a reduced price. Received a credit memorandum. E) Purchased merchandise with terms of 2/10, n/30. The supplier's invoice includes a freight charge.
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Chapter 08 - Accounting for Purchases and Accounts Payable
72. Read the description of the following transactions that are recorded during the accounting period for Hughley Consulting Services. Determine the account to be debited and the account to be credited. A) Issued a check to a supplier as a payment on account. B) Purchased merchandise; the supplier's invoice, which includes a freight charge, has payment terms of 2/10, n/30. C) Returned some damaged merchandise to a supplier and received a credit memorandum. D) Received an allowance for some merchandise that was slightly damaged but can be sold at a reduced price; received a credit memorandum. E) Purchased merchandise with terms of net 30 days.
73. The purchases journal for Carothers Company is shown below. Describe how the amounts would be posted to the general ledger accounts.
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Chapter 08 - Accounting for Purchases and Accounts Payable
74. The purchases journal for Wright Company is shown below. Describe how the amounts would be posted to the general ledger accounts.
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Chapter 08 - Accounting for Purchases and Accounts Payable
75. At the end of September 2013 and before the purchases journal was posted, selected general ledger account balances for Paper Products were as follows (each account had a normal balance):
The purchases journal had the following totals: Purchases, $19,540; Freight In, $1,225; Accounts Payable, $20,765. Calculate the ending balance of each of the three accounts after the posting from the purchases journal. Indicate whether each balance is a debit or credit.
76. At the end of February 2013 and before the purchases journal was posted, selected general ledger account balances for Volter Repair Services were as follows (each account had a normal balance):
The purchases journal had the following totals: Purchases, $28,000; Freight In, $1,000; Accounts Payable, $29,000. Calculate the ending balance of each of the three accounts after the posting from the purchases journal. Indicate whether each balance is a debit or credit.
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Chapter 08 - Accounting for Purchases and Accounts Payable
77. The Picture Perfect Camera Shop had the following transactions for the month of August 2013. Record the transactions on page 7 of a purchases journal and page 9 of a general journal. Total, prove, and rule the purchases journal as of August 31.
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Chapter 08 - Accounting for Purchases and Accounts Payable
78. The Fast Frame Shop had the following transactions for the month of January 2013. Record the transactions on page 7 of a purchases journal and page 9 of a general journal. Total, prove, and rule the purchases journal as of January 31.
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Chapter 08 - Accounting for Purchases and Accounts Payable
79. One of the supplier accounts from the accounts payable ledger for Paragon Video is shown below. Explain each of the entries that have been posted to this supplier's subsidiary ledger account.
80. One of the supplier accounts from the accounts payable ledger for Thompson Consulting Services is shown below. Explain each of the entries that have been posted to this supplier's subsidiary ledger account.
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Chapter 08 - Accounting for Purchases and Accounts Payable
81. One of the supplier accounts from the accounts payable ledger for Allen Company is shown below. Explain each of the entries that have been posted to this supplier's subsidiary ledger account.
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Chapter 08 - Accounting for Purchases and Accounts Payable
82. The accounts payable ledger for Dora's Dollar Shop is shown below. Prepare a schedule of accounts payable as of March 31, 2013.
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Chapter 08 - Accounting for Purchases and Accounts Payable
83. On June 30, 2013, the general ledger of the Shoe Closet, a retail store, showed the following balances: Purchases $19,000; Freight In, $500; Purchases Returns and Allowances, $900. Determine the following: A) What was the delivered cost of purchases for June? B) What was the net delivered cost of purchases for June?
84. On April 30, 2013, the general ledger of the Danielle's Dress Shop showed the following balances: Purchases $9,000; Freight In, $50; Purchases Returns and Allowances, $90. Determine the following: A) What was the delivered cost of purchases for April? B) What was the net delivered cost of purchases for April?
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Chapter 08 - Accounting for Purchases and Accounts Payable
85. On November 30, 2013, the general ledger of Hinges and More Hardware, a retail store, showed the following balances: Purchases, $136,750; Freight In, $2,500; Purchases Returns and Allowances, $4,000. Determine the following: A) What was the delivered cost of purchases for November? B) What was the net delivered cost of purchases for November?
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Chapter 08 - Accounting for Purchases and Accounts Payable
Chapter 08 Accounting for Purchases and Accounts Payable Answer Key
True / False Questions
1. The use of a purchases journal strengthens the audit trail. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
2. Individual amounts in the purchases journal are posted to the general ledger during the month. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-02 Post from the three-column purchases journal to the general ledger accounts. Level: Easy Topic: Merchandise Purchases
3. The supplier's invoice is the source document for a purchase on credit transaction. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
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Chapter 08 - Accounting for Purchases and Accounts Payable
4. To show that the totals of the amount columns in the purchases journal were posted, the appropriate account numbers are written in parentheses below the totals. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-02 Post from the three-column purchases journal to the general ledger accounts. Level: Easy Topic: Merchandise Purchases
5. The abbreviation P1 in the Posting Reference column of an account indicates that the data was posted from page 1 of the cash payments journal. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 08-02 Post from the three-column purchases journal to the general ledger accounts. Level: Easy Topic: Merchandise Purchases
6. The amount of a check issued to a creditor is posted from the cash payments journal to the debit column of the creditor's account in the accounts payable subsidiary ledger. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Level: Medium Topic: Accounts Payable
7. When an accounts payable subsidiary ledger is used, the entry to Accounts Payable requires two posting references in the general journal. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Level: Medium Topic: Accounts Payable
8-29 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
8. A firm's accounts payable ledger may include accounts for creditors who are not suppliers of merchandise. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Level: Medium Topic: Accounts Payable
9. A balance that is circled in the accounts payable ledger is a credit balance. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Level: Medium Topic: Accounts Payable
10. No amounts are posted from the purchases journal to the accounts payable subsidiary ledger during the month. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Level: Easy Topic: Accounts Payable
11. The entry to record the return of merchandise purchased on credit includes a debit to Accounts Payable and a credit to Purchases Returns and Allowances. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Medium Topic: Accounts Payable
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Chapter 08 - Accounting for Purchases and Accounts Payable
12. If an amount recorded in the general journal requires two postings, a diagonal line is used to separate the two posting references in the posting reference column. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Easy Topic: Accounts Payable
13. The Purchases Returns and Allowances account has a normal debit balance. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Easy Topic: Accounts Payable
14. Freight In and Purchases Returns and Allowances are deducted from Purchases to determine the net delivered cost of purchases. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-06 Compute the net delivered cost of purchases Level: Medium Topic: Accounts Payable
8-31 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
15. If a business uses pre numbered purchase orders, it is not necessary to account for every purchase order. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-07 Demonstrate a knowledge of the procedures for effective internal control of purchases. Level: Medium Topic: Accounts Payable
16. A purchase of supplies on account should be recorded in the purchases journal. FALSE
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 08-02 Post from the three-column purchases journal to the general ledger accounts. Level: Medium Topic: Merchandise Purchases
17. At the end of the accounting period the total of the accounts in the accounts payable subsidiary ledgers need not agree to the total in the firm's accounts payable ledger account. FALSE
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Medium Topic: Accounts Payable
8-32 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
Fill in the Blank Questions
18. Whenever a sales department needs goods, it sends the purchasing department a form called a(n) ____________________. purchase requisition
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
19. The discounts that are offered by suppliers to encourage quick payment of invoices by customers are known as ____________________ discounts. cash; sales
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
20. The Freight In account should have a(n) ____________________ balance. debit
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
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Chapter 08 - Accounting for Purchases and Accounts Payable
21. Purchases of merchandise on credit should be recorded in the ____________________ journal. purchases
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
22. The form sent to the supplier to order goods is called a(n) ____________________. purchase order
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
23. Since they are liability accounts, creditor's accounts in the accounts payable ledger normally have ____________________ balances. credit
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Level: Easy Topic: Accounts Payable
8-34 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
24. Purchases returns and allowances are recorded in the ____________________ journal if a firm does not have a purchases returns and allowances journal. general
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Easy Topic: Accounts Payable
25. An allowance received from a creditor is posted to the ____________________ column of the creditor's account. debit
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Easy Topic: Accounts Payable
26. The entry to record a return of merchandise purchased on credit includes a debit to the ____________________ account in the general ledger. Accounts Payable
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Easy Topic: Accounts Payable
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Chapter 08 - Accounting for Purchases and Accounts Payable
27. After damaged goods are returned, the supplier issues a(n) ____________________ memorandum. credit
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Easy Topic: Accounts Payable
28. The Purchases Returns and Allowances account is a(n) ____________________ cost of goods sold account. contra
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Easy Topic: Accounts Payable
29. A list of creditors and the balances owed to them is called a schedule of ____________________. accounts payable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-05 Prepare a schedule of accounts payable. Learning Objective: 08-08 Define the accounting terms new to this chapter. Level: Easy Topic: Accounts Payable
8-36 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
30. When an accounts payable ledger is used, the Accounts Payable account in the general ledger becomes a(n) ____________________ account. control
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-05 Prepare a schedule of accounts payable. Level: Easy Topic: Accounts Payable
31. In a small firm, the creditor accounts are placed in ____________________ order in the accounts payable ledger. alphabetical
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 08-05 Prepare a schedule of accounts payable. Level: Easy Topic: Accounts Payable
32. Good internal control requires a ____________________ of duties. separation
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-07 Demonstrate a knowledge of the procedures for effective internal control of purchases. Level: Easy Topic: Accounts Payable
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Chapter 08 - Accounting for Purchases and Accounts Payable
Multiple Choice Questions
33. Which of the following statements is not correct? A. Cash purchases of merchandise are not recorded in the purchases journal. B. A credit purchase of equipment for use in the business would be recorded in the purchases journal. C. The Purchases account has a normal debit balance. D. The invoice date and credit terms must be carefully recorded in the purchases journal because they determine when payment is due.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Medium Topic: Merchandise Purchases
34. Which of the following statements is correct? A. The purchase requisition is the form sent to a supplier to order goods. B. The Purchases account is reported as an asset on the balance sheet. C. To the customer, a supplier's invoice is a purchase order invoice. D. The credit terms, 2/10, n/30, allow the customer to take a 2 percent discount if payment is made within 10 days of the invoice, otherwise payment is due in full in 30 days.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Medium Topic: Merchandise Purchases
8-38 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
35. After a supplier of merchandise is selected, the purchasing department issues a form called A. a purchase invoice. B. a purchase order. C. a sale invoice. D. a purchase requisition.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
36. The entry to record a purchase of merchandise on credit includes A. a debit to Purchases and a credit to Accounts Receivable. B. a credit to Purchases and a credit to Accounts Payable. C. a debit to Accounts Payable and a credit to Purchases. D. a debit to Purchases and a credit to Accounts Payable.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
37. Freight charges on merchandise purchases should be debited to A. the Purchases account. B. the Accounts Payable account. C. the Freight In account. D. the creditor's account in the subsidiary ledger.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
8-39 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
38. The Purchases account is A. a permanent account. B. a temporary account. C. a subsidiary account. D. a liability account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
39. Purchases of merchandise on credit should be recorded in A. the purchases journal. B. the general journal. C. the cash payments journal. D. the sales journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
40. The source document for recording a purchase of merchandise on credit is A. the purchase order. B. the purchase invoice. C. the receiving report. D. the purchase requisition.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
8-40 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
41. Credit purchases of supplies that are to be used in the business are entered in A. the purchases journal. B. the general journal. C. the cash payments journal. D. the cash receipts journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
42. When the sales department needs goods, it sends the purchasing department a form called A. a purchase invoice. B. a purchase order. C. a purchase requisition. D. a sales invoice.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
43. In a firm that uses special journals, the purchase of merchandise with terms of 2/10, n/30 is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
8-41 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
44. In a firm that uses special journals, the return of damaged merchandise to a supplier and receipt of a credit memorandum is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
45. In a firm that uses special journals, the issuance of a check to a supplier as a payment on account is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
46. In a firm that uses special journals, the purchase of merchandise for $2,800, payable in 30 days, plus a freight charge of $140 is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
8-42 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
47. In a firm that uses special journals, the receipt of a credit memorandum from a supplier for merchandise that was damaged but can be sold at a reduced price is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
48. In a firm that uses special journals, the purchase of merchandise for cash is recorded in the A. cash payments journal. B. cash receipts journal. C. purchases journal. D. general journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
49. Credit terms of 1/10, n/30 mean that A. payment in full is due 10 days after date of the invoice. B. a 1% discount may be taken for up to 30 days. C. if the invoice is paid within 10 days of its date, a 1% discount may be taken; otherwise the total amount is due in 20 days. D. if the invoice is paid within 10 days of its date, a 1% discount may be taken; otherwise the total amount is due in 30 days.
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
8-43 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
50. Check marks next to the individual amounts in the purchases journal mean that the amounts A. have been posted to the general ledger. B. have been posted to the accounts payable subsidiary ledger. C. have been posted to the accounts receivable subsidiary ledger. D. do not need to be posted to any account.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Level: Easy Topic: Accounts Payable
51. Postings to the accounts payable ledger should be made A. daily. B. weekly. C. monthly. D. at the end of the fiscal period.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Level: Easy Topic: Accounts Payable
52. A creditor's account in the accounts payable ledger has a $1,600 beginning balance. After a transaction for $700 is posted from the purchases journal, the balance of the creditor's account is A. $2,300 debit. B. $900 credit. C. $2,300 credit. D. $900 debit.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Level: Easy Topic: Accounts Payable
8-44 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
53. To record a return of merchandise purchased on credit on the books of the buyer, the accountant would A. debit Purchases Returns and Allowances and credit Accounts Receivable. B. debit Purchases Returns and Allowances and credit Purchases. C. debit Accounts Payable and credit Purchases Returns and Allowances. D. debit Purchases and credit Purchases Returns and Allowances.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Easy Topic: Accounts Payable
54. The total of the balances in the individual creditor's accounts should agree with the balance of A. the Purchases account in the general ledger. B. the Accounts Receivable account in the general ledger. C. the Accounts Payable account in the general ledger. D. the Sales account in the general ledger.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 08-05 Prepare a schedule of accounts payable. Level: Easy Topic: Accounts Payable
55. Which of the following statements is correct? A. Freight In is subtracted from Purchases to arrive at delivered cost of purchases. B. Another name that may be used for the Freight In account is "Transportation In." C. Freight charges that are listed on the invoice received from a supplier are not part of the total credit to Accounts Payable to record the credit purchase. D. The Freight In account is subtracted from Sales to get Net Sales.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Learning Objective: 08-06 Compute the net delivered cost of purchases Level: Easy Topic: Accounts Payable Topic: Merchandise Purchases
8-45 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
56. The amount of the purchases for a period is presented in A. the Liabilities section of the balance sheet. B. the Revenue section of the income statement. C. the Cost of Goods Sold section of the income statement. D. the Expenses section of the income statement.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 08-06 Compute the net delivered cost of purchases Level: Easy Topic: Accounts Payable
57. A firm had purchases of $16,200, freight charges of $300, and purchases returns and allowances of $1,100 during one month. Its net delivered cost of purchases was A. $14,800. B. $17,600. C. $16,200. D. $15,400.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 08-06 Compute the net delivered cost of purchases Level: Easy Topic: Accounts Payable
58. Hugh Snow returned merchandise to Farley Co. The entry on Hugh Snow's books to record the return of merchandise to Farley Co. would include a: A. Debit Accounts Payable B. Credit to Purchase Returns and Allowances C. Debit to Account Receivable D. Debit Sales Returns and Allowances
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Medium Topic: Accounts Payable
8-46 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
59. The journal entry to record the purchase on account of $900 of merchandise with freight of $65 prepaid and added to the invoice is: A. debit Purchases $965; credit Accounts Payable $965 B. debit Accounts Payable $965, debit Freight in $65; credit Purchases $900 C. debit Purchases $900, debit Freight In $65; credit Accounts Payable $965 D. debit Accounts Receivable $965; credit Sales $965
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 08-02 Post from the three-column purchases journal to the general ledger accounts. Level: Medium Topic: Merchandise Purchases
60. The journal entry to record the purchase of merchandise on account for $2,750 with freight of $125 prepaid and added to the invoice is: A. debit Purchases $2,750; credit Accounts Payable $2,750 B. debit Accounts Payable $2,875, debit Freight in $125; credit Purchases $2,750 C. debit Purchases $2,750, debit Freight In $125; credit Accounts Payable $2,875 D. debit Accounts Receivable $2,875; credit Sales $2,875
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 08-02 Post from the three-column purchases journal to the general ledger accounts. Level: Medium Topic: Merchandise Purchases
61. Tune Tones Instrument Tuning Company owes Mandy Lynn's Music Studio $4,856 as of November 1. During November Tune Tones purchased merchandise from Mandy Lynn totaling $8,495 and made payments on account to Mandy Lynn in the amount of $7,250. The amount Tune Tones owes Mandy Lynn on November 30 is: A. $6,101 B. $3,611 C. $10,889 D. $7,250
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Level: Medium Topic: Accounts Payable
8-47 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
62. A creditor's account in the accounts payable ledger has a balance of $10,560 as of April 1. After a transaction of $12,800 is posted from the purchases journal and a transaction of $9,200 is posted from the cash payments journal, the balance of the creditor's account on April 30 is: A. $9,200 debit B. $6,960 credit C. $14,160 credit D. $12,800 debit
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Level: Medium Topic: Accounts Payable
63. If a business pays $1,100 on account to a creditor, the effect of the payment is a decrease to cash and a A. decrease to Fees Income B. increase of capital C. increase to accounts receivable D. decrease to accounts payable
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Level: Medium Topic: Accounts Payable
64. Which of the following accounts has a normal debit balance? A. Purchases B. Purchase Returns C. Accounts Payable D. Sales
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Medium Topic: Merchandise Purchases
8-48 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
65. During March a firm purchased $22,650 of merchandise and paid freight charges of $1,720. If the net delivered cost of purchases for the March is $21,900, what is the total purchase returns for March? A. $0 B. $2,470 C. $970 D. $3,440
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 08-06 Compute the net delivered cost of purchases Level: Medium Topic: Accounts Payable
8-49 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
Essay Questions
66. For each of the transactions listed below, identify the journal that should be used to record the transaction. Use CR for cash receipts journal, CP for cash payments journal, S for sales journal, P for purchases journal, and G for general journal.
(A) CP, (B) P, (C) G, (D) G, (E) P
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
8-50 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
67. For each of the transactions listed below, identify the journal that should be used to record the transaction. Use CR for cash receipts journal, CP for cash payments journal, S for sales journal, P for purchases journal, and G for general journal.
(A) P, (B) G, (C) CP, (D) G, (E) P
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Accounts Payable Topic: Merchandise Purchases
8-51 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
68. Match the accounting terms with the description by entering the proper letter in the space provided.
(1) H, (2) K, (3) F, (4) N, (5) A, (6) B, (7) E
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Learning Objective: 08-02 Post from the three-column purchases journal to the general ledger accounts. Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Learning Objective: 08-05 Prepare a schedule of accounts payable. Learning Objective: 08-06 Compute the net delivered cost of purchases Learning Objective: 08-07 Demonstrate a knowledge of the procedures for effective internal control of purchases. Learning Objective: 08-08 Define the accounting terms new to this chapter. Level: Medium Topic: Accounts Payable
8-52 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
69. Match the accounting terms with the description by entering the proper letter in the space provided.
(1) I, (2) D, (3) J, (4) C, (5) L, (6) G, (7) M
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Learning Objective: 08-02 Post from the three-column purchases journal to the general ledger accounts. Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Learning Objective: 08-05 Prepare a schedule of accounts payable. Learning Objective: 08-06 Compute the net delivered cost of purchases Learning Objective: 08-07 Demonstrate a knowledge of the procedures for effective internal control of purchases. Learning Objective: 08-08 Define the accounting terms new to this chapter. Level: Medium Topic: Accounts Payable Topic: Merchandise Purchases
8-53 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
Short Answer Questions
70. Explain each of the following credit terms. A) n/30 B) n/10 EOM C) 2/10, n/30 D) 1/10, n/20 E) 3/5, n/30 A) Net amount of the invoice is due 30 days after the date of the invoice. B) The amount of the invoice is due 10 days after the end of the month in which the invoice is issued. C) If the invoice is paid within 10 days of its date, a 2% discount may be taken; otherwise, the total amount is due in 30 days. D) If the invoice is paid within 10 days of its date, a 1% discount may be taken; otherwise the total amount is due in 20 days. E) If payment is made within 5 days of its date, a 3% discount may be taken; otherwise the total amount is due in 30 days.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Easy Topic: Merchandise Purchases
8-54 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
71. Read the description of the following transactions that are recorded during the accounting period for Drummond Consulting Services. Determine the account to be debited and the account to be credited. A) Purchased merchandise with terms of net 30 days. B) Returned some damaged merchandise to a supplier and received a credit memorandum. C) Issued a check to a supplier as a payment on account. D) Received an allowance for some merchandise that was slightly damaged but can be sold at a reduced price. Received a credit memorandum. E) Purchased merchandise with terms of 2/10, n/30. The supplier's invoice includes a freight charge. A) Debit Purchases; credit Accounts Payable. B) Debit Accounts Payable; credit Purchases Returns and Allowances. C) Debit Accounts Payable; credit Cash. D) Debit Accounts Payable; credit Purchases Returns and Allowances. E) Debit Purchases and Freight In; credit Accounts Payable.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Medium Topic: Merchandise Purchases
8-55 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
72. Read the description of the following transactions that are recorded during the accounting period for Hughley Consulting Services. Determine the account to be debited and the account to be credited. A) Issued a check to a supplier as a payment on account. B) Purchased merchandise; the supplier's invoice, which includes a freight charge, has payment terms of 2/10, n/30. C) Returned some damaged merchandise to a supplier and received a credit memorandum. D) Received an allowance for some merchandise that was slightly damaged but can be sold at a reduced price; received a credit memorandum. E) Purchased merchandise with terms of net 30 days. A) Debit Accounts Payable; credit Cash. B) Debit Purchases and Freight In; credit Accounts Payable. C) Debit Accounts Payable; credit Purchases Returns and Allowances. D) Debit Accounts Payable; credit Purchases Returns and Allowances. E) Debit Purchases; credit Accounts Payable.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Level: Medium Topic: Merchandise Purchases
8-56 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
73. The purchases journal for Carothers Company is shown below. Describe how the amounts would be posted to the general ledger accounts.
Dr. Purchases $4,095; Dr. Freight In $270; Cr. Accounts Payable $4,365
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 08-02 Post from the three-column purchases journal to the general ledger accounts. Level: Medium Topic: Merchandise Purchases
8-57 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
74. The purchases journal for Wright Company is shown below. Describe how the amounts would be posted to the general ledger accounts.
Dr. Purchases $5,700; Dr. Freight In $410; Cr. Accounts Payable $6,110
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 08-02 Post from the three-column purchases journal to the general ledger accounts. Level: Medium Topic: Merchandise Purchases
8-58 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
75. At the end of September 2013 and before the purchases journal was posted, selected general ledger account balances for Paper Products were as follows (each account had a normal balance):
The purchases journal had the following totals: Purchases, $19,540; Freight In, $1,225; Accounts Payable, $20,765. Calculate the ending balance of each of the three accounts after the posting from the purchases journal. Indicate whether each balance is a debit or credit.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 08-02 Post from the three-column purchases journal to the general ledger accounts. Level: Medium Topic: Merchandise Purchases
8-59 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
76. At the end of February 2013 and before the purchases journal was posted, selected general ledger account balances for Volter Repair Services were as follows (each account had a normal balance):
The purchases journal had the following totals: Purchases, $28,000; Freight In, $1,000; Accounts Payable, $29,000. Calculate the ending balance of each of the three accounts after the posting from the purchases journal. Indicate whether each balance is a debit or credit.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 08-02 Post from the three-column purchases journal to the general ledger accounts. Level: Medium Topic: Merchandise Purchases
8-60 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
77. The Picture Perfect Camera Shop had the following transactions for the month of August 2013. Record the transactions on page 7 of a purchases journal and page 9 of a general journal. Total, prove, and rule the purchases journal as of August 31.
8-61 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Learning Objective: 08-02 Post from the three-column purchases journal to the general ledger accounts. Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Medium Topic: Accounts Payable
8-62 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
78. The Fast Frame Shop had the following transactions for the month of January 2013. Record the transactions on page 7 of a purchases journal and page 9 of a general journal. Total, prove, and rule the purchases journal as of January 31.
8-63 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 08-01 Record purchases of merchandise on credit in a three-column purchases journal. Learning Objective: 08-02 Post from the three-column purchases journal to the general ledger accounts. Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Medium Topic: Accounts Payable
8-64 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
79. One of the supplier accounts from the accounts payable ledger for Paragon Video is shown below. Explain each of the entries that have been posted to this supplier's subsidiary ledger account.
Mar. 12 - Purchased merchandise in the amount of $250 on credit. Mar. 15 - Paid $1,500 of cash on account. Mar. 28 - Purchase return or allowance in the amount of $50 as per CM 105 received from vendor.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Medium Topic: Accounts Payable Topic: Merchandise Purchases
8-65 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
80. One of the supplier accounts from the accounts payable ledger for Thompson Consulting Services is shown below. Explain each of the entries that have been posted to this supplier's subsidiary ledger account.
Feb. 2 - Purchased merchandise in the amount of $1,250 on credit. Feb. 5 - Purchase return or allowance in the amount of $200 as per CM 1103 received from vendor. Feb. 7 - Paid $550 of cash on account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Medium Topic: Accounts Payable Topic: Merchandise Purchases
8-66 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
81. One of the supplier accounts from the accounts payable ledger for Allen Company is shown below. Explain each of the entries that have been posted to this supplier's subsidiary ledger account.
Dec. 10 - Purchased merchandise in the amount of $3,000 on credit. Dec. 15 - Purchase return or allowance in the amount of $400 as per CM 810 received from vendor. Dec. 20 - Paid $7,100 of cash on account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 08-03 Post credit purchases from the purchases journal to the accounts payable subsidiary ledger. Learning Objective: 08-04 Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger. Level: Medium Topic: Accounts Payable
8-67 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
82. The accounts payable ledger for Dora's Dollar Shop is shown below. Prepare a schedule of accounts payable as of March 31, 2013.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 08-06 Compute the net delivered cost of purchases Level: Medium Topic: Accounts Payable
8-68 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
83. On June 30, 2013, the general ledger of the Shoe Closet, a retail store, showed the following balances: Purchases $19,000; Freight In, $500; Purchases Returns and Allowances, $900. Determine the following: A) What was the delivered cost of purchases for June? B) What was the net delivered cost of purchases for June? A) $19,500 B) $18,600
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 08-06 Compute the net delivered cost of purchases Level: Medium Topic: Accounts Payable
84. On April 30, 2013, the general ledger of the Danielle's Dress Shop showed the following balances: Purchases $9,000; Freight In, $50; Purchases Returns and Allowances, $90. Determine the following: A) What was the delivered cost of purchases for April? B) What was the net delivered cost of purchases for April? A) $9,050 B) $8,960
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 08-06 Compute the net delivered cost of purchases Level: Medium Topic: Accounts Payable
8-69 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 08 - Accounting for Purchases and Accounts Payable
85. On November 30, 2013, the general ledger of Hinges and More Hardware, a retail store, showed the following balances: Purchases, $136,750; Freight In, $2,500; Purchases Returns and Allowances, $4,000. Determine the following: A) What was the delivered cost of purchases for November? B) What was the net delivered cost of purchases for November? A) $139,250 B) $135,250
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 08-06 Compute the net delivered cost of purchases Level: Medium Topic: Accounts Payable
8-70 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
Chapter 09 Cash Receipts, Cash Payments, and Banking Procedures True / False Questions
1. Cash Short or Over is an expense account when it has a debit balance. True False
2. If cash is over, it is entered in the Other Account Credit column of the cash receipts journal and the figure is circled. True False
3. The individual amounts in the Sales Credit column of the cash receipts journal are posted to the accounts receivable subsidiary ledger. True False
4. Amounts that appear in the Other Accounts Credit section of the cash receipts journal require individual posting to the general ledger. True False
5. After a multicolumn special journal such as a cash receipts journal is totaled, it should be proved to be sure that the debits and credits in the journal are equal. True False
6. Purchases Discounts is a contra cost of goods sold account. True False
7. Grouping all transactions involving cash payments together in the cash payments journal strengthens the audit trail. True False
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
8. No end-of-month posting is required for the total of the Other Accounts Debit column of the cash payments journal. True False
9. The individual amounts in the Accounts Payable Debit column of the cash payments journal are posted to the accounts payable subsidiary ledger. True False
10. The entry to replenish petty cash includes a debit to Petty Cash Fund and a credit to Cash. True False
11. In a firm that has a good system of internal control, cash receipts are deposited often. True False
12. The monthly bank statement should be received and reconciled by the employee who deposits cash receipts and writes the checks. True False
13. A strong system of internal control requires that all payments be made by check except those made from a carefully controlled cash fund such as a petty cash fund. True False
14. A check that has a full endorsement can be further endorsed by any bearer and therefore, is not as safe as a check with a blank endorsement. True False
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
15. To arrive at the accurate balance on a bank reconciliation statement, it is necessary to deduct an NSF check from the bank statement balance. True False
16. Bank Reconciliations are not that important because banks never make errors. True False
Fill in the Blank Questions
17. A(n) ____________________ is a written promise to pay a specified amount of money at a specified time. ________________________________________
18. If the amount of cash available for deposit is ____________________ than the amount listed on the audit tape taken from the cash register, the Cash Short or Over account is debited. ________________________________________
19. The entry to record the issuance of a check in settlement of an interest-bearing promissory note includes a debit to Notes Payable, a debit to ____________________, and a credit to Cash. ________________________________________
20. To record payment of sales tax owed, the accountant would debit ____________________ and credit Cash. ________________________________________
21. The Petty Cash Fund account has a(n) ____________________ balance. ________________________________________
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
22. The person or firm that issues a check is called the ____________________, or payer. ________________________________________
23. If a payee indicates, as part of the endorsement, the name of the person, firm, or bank to whom the check is to be payable, the payee has made a(n) ____________________ endorsement. ________________________________________
24. To transfer ownership of a check from one party to another, it is necessary to ____________________ the check. ________________________________________
25. A(n) ____________________ is a form received from the bank showing all transactions recorded in the depositor's account during the month. ________________________________________
26. When a bank deducts any amount other than a paid check from a depositor's account, it issues a form called a(n) ____________________ memorandum. ________________________________________
27. Checks issued by a firm and entered in its records that have not been paid by the bank are called ____________________ checks. ________________________________________
28. The process of determining why a difference exists between a firm's records and the bank's records and bringing the two sets of records into balance is known as ____________________ the bank statement. ________________________________________
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
29. Checks issued by a firm that were paid by the bank and returned to the firm with the bank statement are called ____________________ checks. ________________________________________
30. A(n) ____________________ check is a check dated some time in the future. ________________________________________
31. If a firm's bank reconciliation statement shows a bank statement balance of $12,000, total deposits in transit of $1,500, and total outstanding checks of $1,000, the adjusted bank balance is ____________________. ________________________________________
Multiple Choice Questions
32. Which of the following statements is not correct? A. In accounting, the term "cash" includes checks, money orders, and funds on deposit in a bank as well as currency and coins. B. The cash register proof is used to enter the cash sales and sales tax in the cash receipts journal. C. The entry to record the receipt of a promissory note to replace an open account is recorded in the cash receipts journal. D. The cash receipts journal has separate columns for debits to Cash, credits to Accounts Receivable, and credits to Sales and Sales Tax Payable.
33. A cash sale of merchandise would be recorded in A. the sales journal. B. the general journal. C. the cash receipts journal. D. the cash payments journal.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
34. Upon collection of the amount due on an interest-bearing promissory note from a customer, the accountant would debit Cash, credit Notes Receivable, and A. debit Interest Expense. B. credit Interest Income. C. credit Interest Expense. D. debit Interest Income.
35. The entry to record an additional cash investment by the owner is recorded in A. the cash payments journal. B. the cash receipts journal. C. the general journal. D. the purchases journal.
36. Which of the following statements is correct? A. The entry to record the payment of an invoice within the cash discount period would include a debit to the Purchases Discounts account. B. To record a cash purchase of merchandise, the accountant would debit Purchases and credit Cash. C. A transaction that is properly recorded in the cash payments journal will always include the recording of an amount in the Cash Debit column. D. Purchase discounts is a contra revenue account.
37. To record the payment of a purchase invoice when a cash discount is taken, the accountant would A. debit Accounts Payable, credit Purchases Discounts, and credit Cash. B. debit Accounts Payable, debit Purchases Discounts, and credit Cash. C. debit Accounts Payable and credit Cash. D. debit Purchases, credit Purchases Discounts, and credit Cash.
38. The entry to replenish a petty cash fund includes A. a debit to Cash and a credit to Petty Cash. B. a debit to Petty Cash Fund and a credit to Cash. C. debits to various expense accounts and a credit to Petty Cash Fund. D. debits to various expense accounts and a credit to Cash.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
39. The most appropriate form of endorsement of a check for business purposes is A. the blank endorsement. B. the restrictive endorsement. C. the full endorsement. D. no endorsement.
40. On a bank reconciliation statement, you would find all of the following except A. a list of canceled checks. B. a list of NSF checks. C. a list of outstanding checks. D. the bank service charge.
41. A firm's bank reconciliation statement shows a book balance of $15,820, an NSF check of $400, and a service charge of $20. Its adjusted book balance is A. $16,240. B. $15,400. C. $15,440. D. $16,200.
42. A firm's bank reconciliation statement shows a book balance of $31,640, an NSF check of $800, and a service charge of $40. Its adjusted book balance is A. $32,480. B. $30,800. C. $30,880. D. $32,400.
43. To arrive at an accurate balance on a bank reconciliation statement, outstanding checks should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
44. To arrive at an accurate balance on a bank reconciliation statement, a credit memorandum from the bank for the collection of a note and interest should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
45. To arrive at an accurate balance on a bank reconciliation statement, a service charge should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
46. To arrive at an accurate balance on a bank reconciliation statement, a debit memorandum for a customer check marked NSF should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
47. To arrive at an accurate balance on a bank reconciliation statement, an error made by the bank in which the bank deducted a check issued by another business from the balance of the company's bank account should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
48. A check issued for $890 to pay a vendor on account was recorded in the firm's records as $980; the canceled check was properly listed on the bank statement at $890. To arrive at an accurate balance on a bank reconciliation statement, the error should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
49. A check issued for $1,980 to pay a vendor on account was recorded in the firm's records as $1,890; the canceled check was properly listed on the bank statement at $1,980. To arrive at an accurate balance on a bank reconciliation statement, the error should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
50. To arrive at an accurate balance on a bank reconciliation statement, deposits in transit should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
51. A firm appropriately wrote a check for $78 but entered the amount as payment of $87 in its records. On a bank reconciliation statement this error would be shown as A. A deduction of $9 from the book balance. B. An addition of $9 to the book balance. C. A deduction of $9 from the bank statement balance. D. An addition of $9 to the bank statement balance.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
52. Which of the following would not be shown as an adjustment to the book balance on a bank reconciliation statement? A. Bank service charges B. NSF checks C. Deposits in transit D. A charge for printing new checks
53. Included with its bank statement a firm may receive a credit memorandum, which could indicate A. a bank service charge deducted from the firm's account balance. B. the bank's return of a dishonored (NSF) check that was issued by a credit customer of the firm. C. a fee for printing new business checks. D. an addition to the firm's account balance because the bank collected the amount due on a promissory note from a customer of the firm.
54. If a check written by a firm is not canceled by the bank and returned with the month's bank statement, the firm should A. consider this check as outstanding when preparing the bank reconciliation. B. immediately notify the bank requesting that it correct its records. C. adjust the balance in the firm's checkbook to reflect the data that appears in the bank's records. D. make no adjustment when preparing the bank reconciliation.
55. After a bank reconciliation statement is completed, a firm may have to make an entry in its accounting records for A. outstanding checks. B. deposits in transit. C. the bank statement balance. D. NSF checks.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
56. The entry in a firm's accounting records for a credit customer's check that was returned by the bank marked "NSF" would include A. a debit to Miscellaneous Expense and a credit to Cash. B. a debit to Accounts Receivable and a credit to Accounts Payable. C. a debit to Accounts Receivable and a credit to Cash. D. a debit to Cash and a credit to Accounts Receivable.
57. Merchandise costing $5,600 with terms of 1/10, n/30, with transportation costs of $320 included on the invoice (not included in the $5,600) is sold on account. If the bill is paid within ten days, the amount of the purchase discount is. A. $59.20. B. $56.00. C. $3.20. D. $52.80
58. Beckett Co. sold merchandise on account for $10,600, terms 2/10, n/30. Freight charges of $250 were prepaid by the seller and added to the invoice. The customer returned $800 of merchandise before making the payment then paid the invoice within the discount period. What is the amount Beckett Co. received? A. $9,854 B. $9,604 C. $9,849 D. $9,833
59. Merchandise is sold for $8,820, terms 1/10, n/30. Prior to payment, the customer returned $560 of the merchandise. If the invoice is paid within the discount period the amount of the sales discount is: A. $82.60 B. $165.20 C. $88.20 D. $93.80
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
BANK RECONCILIATION: Indicate in which section of the Bank Reconciliation Statement the following reconciling items would appear.
60. A check written by Bosley Co. for $168 was mistakenly recorded in the company records as $186. A. Option A. B. Option B. C. Option C. D. Option D.
61. An NSF check from a customer. A. Option A. B. Option B. C. Option C. D. Option D.
62. A canceled check for $147 erroneously listed on bank statement as $74. A. Option A. B. Option B. C. Option C. D. Option D.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
63. A deposit in transit. A. Option A. B. Option B. C. Option C. D. Option D.
64. A service charge charged by the bank. A. Option A. B. Option B. C. Option C. D. Option D.
65. Of the four categories shown in the form above, which category or categories require journal entries in the firm's records? A. Bank Statement Balance Additions and Bank Statement Balance Deductions B. Bank Statement Balance Additions and Ledger Balance of Cash Additions C. Bank Statement Balance Deductions and Ledger Balance of Cash Deductions D. Ledger Balance of Cash Additions and Ledger Balance of Cash Deductions
Short Answer Questions
66. Read each of the following transactions. Determine the accounts to be debited and credited. A) Sold merchandise for $200 in cash plus sales tax of $14. B) Collected $3,400 from credit customers on account. C) Sold merchandise for $1,600 in cash plus sales tax of $112. There was a cash shortage of $6.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
67. Read each of the following transactions. Determine the accounts to be debited and credited. A) Collected cash in settlement of a $600 promissory note plus interest of $18. B) Jaime Gomez, the owner, made an additional cash investment of $11,000. C) Sold merchandise for $3,000 in cash plus sales tax of $210. There was a cash overage of $4.
68. Read each of the following transactions. Determine the accounts to be debited and credited. A) Issued a check for $10,600 to pay a $10,000 note plus interest of $600. B) Issued a check for $1,500 to pay the monthly rent. C) Issued a check for $7,840 to a creditor on account for an invoice of $8,000 less a cash discount of $160.
69. Read each of the following transactions. Determine the accounts to be debited and credited. A) Purchased merchandise for $950 in cash. B) Issued a check for $752 to remit sales tax to the state sales tax authority. C) Issued a check for $1,894 to purchase supplies.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
70. Read each of the following transactions. Determine the accounts to be debited and credited. A) Issued a check for $2,500 to Jaime Gomez, the owner, as a cash withdrawal for personal use. B) Issued a check for $75 to establish a petty cash fund. C) Issued a check for $50 to replenish the petty cash fund. An analysis of the payments from the fund showed the following totals: Supplies, $25; Delivery Expense, $10; Miscellaneous Expense, $15.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
71. Record the following transactions for the month of April 2013 on page 4 of a cash receipts journal. Total, prove, and rule the cash receipts journal as of April 30.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
72. Record the following transactions for the month of June 2013 on page 23 of a cash receipts journal. Total, prove, and rule the cash receipts journal as of June 30.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
73. Record the following transactions for the month of November 2013 on page 8 of a cash receipts journal. Total, prove, and rule the cash receipts journal as of November 30.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
74. The cash receipts journal for Able Company is shown below. Describe how the amounts would be posted to the general ledger accounts.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
75. The cash receipts journal for Arlen Company is shown below. Describe how the amounts would be posted to the general ledger accounts.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
76. The cash receipts journal for Carlson Company is shown below. Describe how the amounts would be posted to the accounts receivable subsidiary ledger accounts.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
77. The cash receipts journal for Engels Company is shown below. Describe how the amounts would be posted to the accounts receivable subsidiary ledger accounts.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
78. Record the following transactions for the month of April 2013 on page 6 of a cash payments journal. Total, prove, and rule the cash payments journal as of April 30.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
79. Record the following transactions for the month of June 2013 on page 6 of a cash payments journal. Total, prove, and rule the cash payments journal as of June 30.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
80. Record the following transactions for the month of November 2013 on page 18 of a cash payments journal. Total, prove, and rule the cash payments journal as of November 30.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
81. The cash payments journal for Excel Company is shown below. Describe how the amounts would be posted to the general ledger accounts.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
82. On March 31, 2013, Home Decorating Pavilion received a bank statement with an ending balance of $9,750. The balance in the firm's checkbook and Cash account on the same date was $10,290. The difference between the two balances is caused by the items listed below.
Instructions: 1. Prepare a bank reconciliation statement for the firm as of March 31, 2013. 2. Record entries for any items on the bank reconciliation statement that must be journalized. Date the entries March 31, 2013. Use page 4 of a general journal.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
83. On December 31, 2013, Designer's Warehouse received a bank statement with an ending balance of $19,500. The balance in the firm's checkbook and Cash account on the same date was $20,580. The difference between the two balances is caused by the items listed below.
Instructions: 1. Prepare a bank reconciliation statement for the firm as of December 31, 2013. 2. Record entries for any items on the bank reconciliation statement that must be journalized. Date the entries December 31, 2013. Use page 19 of a general journal.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
Essay Questions
84. Match the accounting terms with the description by entering the proper letter in the space provided.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
85. Match the accounting terms with the description by entering the proper letter in the space provided.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
Chapter 09 Cash Receipts, Cash Payments, and Banking Procedures Answer Key
True / False Questions
1. Cash Short or Over is an expense account when it has a debit balance. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-02 Account for cash short or over. Level: Easy Topic: Cash Receipts
2. If cash is over, it is entered in the Other Account Credit column of the cash receipts journal and the figure is circled. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 09-02 Account for cash short or over. Level: Easy Topic: Cash Receipts
3. The individual amounts in the Sales Credit column of the cash receipts journal are posted to the accounts receivable subsidiary ledger. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 09-03 Post from the cash receipts journal to subsidiary and general ledgers. Level: Easy Topic: Cash Receipts
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
4. Amounts that appear in the Other Accounts Credit section of the cash receipts journal require individual posting to the general ledger. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 09-03 Post from the cash receipts journal to subsidiary and general ledgers. Level: Easy Topic: Cash Receipts
5. After a multicolumn special journal such as a cash receipts journal is totaled, it should be proved to be sure that the debits and credits in the journal are equal. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 09-03 Post from the cash receipts journal to subsidiary and general ledgers. Level: Easy Topic: Cash Receipts
6. Purchases Discounts is a contra cost of goods sold account. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-04 Record cash payments in a cash payments journal. Level: Easy Topic: Cash Payments
7. Grouping all transactions involving cash payments together in the cash payments journal strengthens the audit trail. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 09-01 Record cash receipts in a cash receipts journal. Level: Easy Topic: Cash Receipts
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
8. No end-of-month posting is required for the total of the Other Accounts Debit column of the cash payments journal. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 09-05 Post from the cash payments journal to subsidiary and general ledgers. Level: Easy Topic: Cash Payments
9. The individual amounts in the Accounts Payable Debit column of the cash payments journal are posted to the accounts payable subsidiary ledger. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 09-05 Post from the cash payments journal to subsidiary and general ledgers. Level: Easy Topic: Cash Payments
10. The entry to replenish petty cash includes a debit to Petty Cash Fund and a credit to Cash. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 09-06 Demonstrate a knowledge of procedures for a petty cash fund. Level: Medium Topic: Cash Payments
11. In a firm that has a good system of internal control, cash receipts are deposited often. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 09-07 Demonstrate a knowledge of internal control procedures for cash. Level: Easy Topic: Cash Payments
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
12. The monthly bank statement should be received and reconciled by the employee who deposits cash receipts and writes the checks. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-07 Demonstrate a knowledge of internal control procedures for cash. Level: Medium Topic: Cash Payments
13. A strong system of internal control requires that all payments be made by check except those made from a carefully controlled cash fund such as a petty cash fund. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 09-07 Demonstrate a knowledge of internal control procedures for cash. Level: Easy Topic: Cash Payments
14. A check that has a full endorsement can be further endorsed by any bearer and therefore, is not as safe as a check with a blank endorsement. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-08 Write a check; endorse checks; prepare a bank deposit slip; and maintain a checkbook balance. Level: Medium Topic: Banking Procedures
15. To arrive at the accurate balance on a bank reconciliation statement, it is necessary to deduct an NSF check from the bank statement balance. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Medium Topic: Banking Procedures
9-35 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
16. Bank Reconciliations are not that important because banks never make errors. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
Fill in the Blank Questions
17. A(n) ____________________ is a written promise to pay a specified amount of money at a specified time. promissory note
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-01 Record cash receipts in a cash receipts journal. Learning Objective: 09-11 Understand how businesses use online banking to manage cash activities. Level: Easy Topic: Banking Procedures Topic: Cash Receipts
18. If the amount of cash available for deposit is ____________________ than the amount listed on the audit tape taken from the cash register, the Cash Short or Over account is debited. less
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 09-02 Account for cash short or over. Level: Easy Topic: Cash Receipts
9-36 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
19. The entry to record the issuance of a check in settlement of an interest-bearing promissory note includes a debit to Notes Payable, a debit to ____________________, and a credit to Cash. Interest Expense
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-04 Record cash payments in a cash payments journal. Level: Easy Topic: Cash Payments
20. To record payment of sales tax owed, the accountant would debit ____________________ and credit Cash. Sales Tax Payable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 09-04 Record cash payments in a cash payments journal. Level: Easy Topic: Cash Payments
21. The Petty Cash Fund account has a(n) ____________________ balance. debit
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-06 Demonstrate a knowledge of procedures for a petty cash fund. Level: Easy Topic: Cash Payments
22. The person or firm that issues a check is called the ____________________, or payer. drawer
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-08 Write a check; endorse checks; prepare a bank deposit slip; and maintain a checkbook balance. Learning Objective: 09-11 Understand how businesses use online banking to manage cash activities. Level: Easy Topic: Banking Procedures
9-37 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
23. If a payee indicates, as part of the endorsement, the name of the person, firm, or bank to whom the check is to be payable, the payee has made a(n) ____________________ endorsement. full
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-08 Write a check; endorse checks; prepare a bank deposit slip; and maintain a checkbook balance. Level: Easy Topic: Banking Procedures
24. To transfer ownership of a check from one party to another, it is necessary to ____________________ the check. endorse
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-08 Write a check; endorse checks; prepare a bank deposit slip; and maintain a checkbook balance. Level: Easy Topic: Banking Procedures
25. A(n) ____________________ is a form received from the bank showing all transactions recorded in the depositor's account during the month. bank statement
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
9-38 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
26. When a bank deducts any amount other than a paid check from a depositor's account, it issues a form called a(n) ____________________ memorandum. debit
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
27. Checks issued by a firm and entered in its records that have not been paid by the bank are called ____________________ checks. outstanding
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-09 Reconcile the monthly bank statement. Learning Objective: 09-11 Understand how businesses use online banking to manage cash activities. Level: Easy Topic: Banking Procedures
28. The process of determining why a difference exists between a firm's records and the bank's records and bringing the two sets of records into balance is known as ____________________ the bank statement. reconciling
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
9-39 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
29. Checks issued by a firm that were paid by the bank and returned to the firm with the bank statement are called ____________________ checks. canceled
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
30. A(n) ____________________ check is a check dated some time in the future. postdated
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-08 Write a check; endorse checks; prepare a bank deposit slip; and maintain a checkbook balance. Learning Objective: 09-11 Understand how businesses use online banking to manage cash activities. Level: Easy Topic: Banking Procedures
31. If a firm's bank reconciliation statement shows a bank statement balance of $12,000, total deposits in transit of $1,500, and total outstanding checks of $1,000, the adjusted bank balance is ____________________. $12,500
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
9-40 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
Multiple Choice Questions
32. Which of the following statements is not correct? A. In accounting, the term "cash" includes checks, money orders, and funds on deposit in a bank as well as currency and coins. B. The cash register proof is used to enter the cash sales and sales tax in the cash receipts journal. C. The entry to record the receipt of a promissory note to replace an open account is recorded in the cash receipts journal. D. The cash receipts journal has separate columns for debits to Cash, credits to Accounts Receivable, and credits to Sales and Sales Tax Payable.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 09-01 Record cash receipts in a cash receipts journal. Level: Medium Topic: Cash Receipts
33. A cash sale of merchandise would be recorded in A. the sales journal. B. the general journal. C. the cash receipts journal. D. the cash payments journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-01 Record cash receipts in a cash receipts journal. Level: Easy Topic: Cash Receipts
9-41 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
34. Upon collection of the amount due on an interest-bearing promissory note from a customer, the accountant would debit Cash, credit Notes Receivable, and A. debit Interest Expense. B. credit Interest Income. C. credit Interest Expense. D. debit Interest Income.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 09-01 Record cash receipts in a cash receipts journal. Level: Easy Topic: Cash Receipts
35. The entry to record an additional cash investment by the owner is recorded in A. the cash payments journal. B. the cash receipts journal. C. the general journal. D. the purchases journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 09-01 Record cash receipts in a cash receipts journal. Level: Easy Topic: Cash Receipts
9-42 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
36. Which of the following statements is correct? A. The entry to record the payment of an invoice within the cash discount period would include a debit to the Purchases Discounts account. B. To record a cash purchase of merchandise, the accountant would debit Purchases and credit Cash. C. A transaction that is properly recorded in the cash payments journal will always include the recording of an amount in the Cash Debit column. D. Purchase discounts is a contra revenue account.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 09-04 Record cash payments in a cash payments journal. Level: Medium Topic: Cash Payments
37. To record the payment of a purchase invoice when a cash discount is taken, the accountant would A. debit Accounts Payable, credit Purchases Discounts, and credit Cash. B. debit Accounts Payable, debit Purchases Discounts, and credit Cash. C. debit Accounts Payable and credit Cash. D. debit Purchases, credit Purchases Discounts, and credit Cash.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-04 Record cash payments in a cash payments journal. Level: Medium Topic: Cash Payments
38. The entry to replenish a petty cash fund includes A. a debit to Cash and a credit to Petty Cash. B. a debit to Petty Cash Fund and a credit to Cash. C. debits to various expense accounts and a credit to Petty Cash Fund. D. debits to various expense accounts and a credit to Cash.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-06 Demonstrate a knowledge of procedures for a petty cash fund. Level: Medium Topic: Cash Payments
9-43 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
39. The most appropriate form of endorsement of a check for business purposes is A. the blank endorsement. B. the restrictive endorsement. C. the full endorsement. D. no endorsement.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-08 Write a check; endorse checks; prepare a bank deposit slip; and maintain a checkbook balance. Level: Easy Topic: Banking Procedures
40. On a bank reconciliation statement, you would find all of the following except A. a list of canceled checks. B. a list of NSF checks. C. a list of outstanding checks. D. the bank service charge.
AACSB: Analytic AICPA BB: Industry Bloom's: Analyze Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Medium Topic: Banking Procedures
41. A firm's bank reconciliation statement shows a book balance of $15,820, an NSF check of $400, and a service charge of $20. Its adjusted book balance is A. $16,240. B. $15,400. C. $15,440. D. $16,200.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Medium Topic: Banking Procedures
9-44 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
42. A firm's bank reconciliation statement shows a book balance of $31,640, an NSF check of $800, and a service charge of $40. Its adjusted book balance is A. $32,480. B. $30,800. C. $30,880. D. $32,400.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Medium Topic: Banking Procedures
43. To arrive at an accurate balance on a bank reconciliation statement, outstanding checks should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
44. To arrive at an accurate balance on a bank reconciliation statement, a credit memorandum from the bank for the collection of a note and interest should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
9-45 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
45. To arrive at an accurate balance on a bank reconciliation statement, a service charge should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
46. To arrive at an accurate balance on a bank reconciliation statement, a debit memorandum for a customer check marked NSF should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
47. To arrive at an accurate balance on a bank reconciliation statement, an error made by the bank in which the bank deducted a check issued by another business from the balance of the company's bank account should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Medium Topic: Banking Procedures
9-46 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
48. A check issued for $890 to pay a vendor on account was recorded in the firm's records as $980; the canceled check was properly listed on the bank statement at $890. To arrive at an accurate balance on a bank reconciliation statement, the error should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Medium Topic: Banking Procedures
49. A check issued for $1,980 to pay a vendor on account was recorded in the firm's records as $1,890; the canceled check was properly listed on the bank statement at $1,980. To arrive at an accurate balance on a bank reconciliation statement, the error should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Medium Topic: Banking Procedures
50. To arrive at an accurate balance on a bank reconciliation statement, deposits in transit should be A. added to the bank statement balance. B. added to the book balance. C. deducted from the bank statement balance. D. deducted from the book balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
9-47 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
51. A firm appropriately wrote a check for $78 but entered the amount as payment of $87 in its records. On a bank reconciliation statement this error would be shown as A. A deduction of $9 from the book balance. B. An addition of $9 to the book balance. C. A deduction of $9 from the bank statement balance. D. An addition of $9 to the bank statement balance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Medium Topic: Banking Procedures
52. Which of the following would not be shown as an adjustment to the book balance on a bank reconciliation statement? A. Bank service charges B. NSF checks C. Deposits in transit D. A charge for printing new checks
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
53. Included with its bank statement a firm may receive a credit memorandum, which could indicate A. a bank service charge deducted from the firm's account balance. B. the bank's return of a dishonored (NSF) check that was issued by a credit customer of the firm. C. a fee for printing new business checks. D. an addition to the firm's account balance because the bank collected the amount due on a promissory note from a customer of the firm.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Evaluate Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Medium Topic: Banking Procedures
9-48 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
54. If a check written by a firm is not canceled by the bank and returned with the month's bank statement, the firm should A. consider this check as outstanding when preparing the bank reconciliation. B. immediately notify the bank requesting that it correct its records. C. adjust the balance in the firm's checkbook to reflect the data that appears in the bank's records. D. make no adjustment when preparing the bank reconciliation.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
55. After a bank reconciliation statement is completed, a firm may have to make an entry in its accounting records for A. outstanding checks. B. deposits in transit. C. the bank statement balance. D. NSF checks.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 09-10 Record any adjusting entries required from the bank reconciliation. Level: Medium Topic: Banking Procedures
56. The entry in a firm's accounting records for a credit customer's check that was returned by the bank marked "NSF" would include A. a debit to Miscellaneous Expense and a credit to Cash. B. a debit to Accounts Receivable and a credit to Accounts Payable. C. a debit to Accounts Receivable and a credit to Cash. D. a debit to Cash and a credit to Accounts Receivable.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 09-10 Record any adjusting entries required from the bank reconciliation. Level: Medium Topic: Banking Procedures
9-49 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
57. Merchandise costing $5,600 with terms of 1/10, n/30, with transportation costs of $320 included on the invoice (not included in the $5,600) is sold on account. If the bill is paid within ten days, the amount of the purchase discount is. A. $59.20. B. $56.00. C. $3.20. D. $52.80
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 09-04 Record cash payments in a cash payments journal. Level: Medium Topic: Cash Payments
58. Beckett Co. sold merchandise on account for $10,600, terms 2/10, n/30. Freight charges of $250 were prepaid by the seller and added to the invoice. The customer returned $800 of merchandise before making the payment then paid the invoice within the discount period. What is the amount Beckett Co. received? A. $9,854 B. $9,604 C. $9,849 D. $9,833
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 09-01 Record cash receipts in a cash receipts journal. Level: Medium Topic: Cash Receipts
9-50 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
59. Merchandise is sold for $8,820, terms 1/10, n/30. Prior to payment, the customer returned $560 of the merchandise. If the invoice is paid within the discount period the amount of the sales discount is: A. $82.60 B. $165.20 C. $88.20 D. $93.80
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 09-01 Record cash receipts in a cash receipts journal. Level: Easy Topic: Cash Receipts
BANK RECONCILIATION: Indicate in which section of the Bank Reconciliation Statement the following reconciling items would appear.
9-51 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
60. A check written by Bosley Co. for $168 was mistakenly recorded in the company records as $186. A. Option A. B. Option B. C. Option C. D. Option D.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Medium Topic: Banking Procedures
61. An NSF check from a customer. A. Option A. B. Option B. C. Option C. D. Option D.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
62. A canceled check for $147 erroneously listed on bank statement as $74. A. Option A. B. Option B. C. Option C. D. Option D.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
9-52 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
63. A deposit in transit. A. Option A. B. Option B. C. Option C. D. Option D.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
64. A service charge charged by the bank. A. Option A. B. Option B. C. Option C. D. Option D.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
65. Of the four categories shown in the form above, which category or categories require journal entries in the firm's records? A. Bank Statement Balance Additions and Bank Statement Balance Deductions B. Bank Statement Balance Additions and Ledger Balance of Cash Additions C. Bank Statement Balance Deductions and Ledger Balance of Cash Deductions D. Ledger Balance of Cash Additions and Ledger Balance of Cash Deductions
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 09-09 Reconcile the monthly bank statement. Level: Easy Topic: Banking Procedures
9-53 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
Short Answer Questions
66. Read each of the following transactions. Determine the accounts to be debited and credited. A) Sold merchandise for $200 in cash plus sales tax of $14. B) Collected $3,400 from credit customers on account. C) Sold merchandise for $1,600 in cash plus sales tax of $112. There was a cash shortage of $6. A) Debit Cash; credit Sales and Sales Tax Payable B) Debit Cash; credit Accounts Receivable C) Debit Cash and Cash Short or Over; credit Sales and Sales Tax Payable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-01 Record cash receipts in a cash receipts journal. Level: Medium Topic: Cash Receipts
67. Read each of the following transactions. Determine the accounts to be debited and credited. A) Collected cash in settlement of a $600 promissory note plus interest of $18. B) Jaime Gomez, the owner, made an additional cash investment of $11,000. C) Sold merchandise for $3,000 in cash plus sales tax of $210. There was a cash overage of $4. A) Debit Cash; credit Notes Receivable and Interest Income B) Debit Cash; credit Jaime Gomez, Capital C) Debit Cash; credit Sales, Sales Tax Payable, and Cash Short or Over
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-01 Record cash receipts in a cash receipts journal. Level: Medium Topic: Cash Receipts
9-54 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
68. Read each of the following transactions. Determine the accounts to be debited and credited. A) Issued a check for $10,600 to pay a $10,000 note plus interest of $600. B) Issued a check for $1,500 to pay the monthly rent. C) Issued a check for $7,840 to a creditor on account for an invoice of $8,000 less a cash discount of $160. A) Debit Notes Payable and Interest Expense; credit Cash B) Debit Rent Expense; credit Cash C) Debit Accounts Payable; credit Cash and Purchases Discounts
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-04 Record cash payments in a cash payments journal. Level: Medium Topic: Cash Payments
69. Read each of the following transactions. Determine the accounts to be debited and credited. A) Purchased merchandise for $950 in cash. B) Issued a check for $752 to remit sales tax to the state sales tax authority. C) Issued a check for $1,894 to purchase supplies. A) Debit Purchases; credit Cash B) Debit Sales Tax Payable; credit Cash C) Debit Supplies; credit Cash
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-04 Record cash payments in a cash payments journal. Level: Easy Topic: Cash Payments
9-55 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
70. Read each of the following transactions. Determine the accounts to be debited and credited. A) Issued a check for $2,500 to Jaime Gomez, the owner, as a cash withdrawal for personal use. B) Issued a check for $75 to establish a petty cash fund. C) Issued a check for $50 to replenish the petty cash fund. An analysis of the payments from the fund showed the following totals: Supplies, $25; Delivery Expense, $10; Miscellaneous Expense, $15. A) Debit Jaime Gomez, Drawing; credit Cash B) Debit Petty Cash Fund; credit Cash C) Debit Supplies, Delivery Expense, and Miscellaneous Expense; credit Cash
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-06 Demonstrate a knowledge of procedures for a petty cash fund. Level: Medium Topic: Cash Payments
9-56 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
71. Record the following transactions for the month of April 2013 on page 4 of a cash receipts journal. Total, prove, and rule the cash receipts journal as of April 30.
9-57 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-01 Record cash receipts in a cash receipts journal. Learning Objective: 09-02 Account for cash short or over. Level: Medium Topic: Cash Receipts
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
72. Record the following transactions for the month of June 2013 on page 23 of a cash receipts journal. Total, prove, and rule the cash receipts journal as of June 30.
9-59 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-01 Record cash receipts in a cash receipts journal. Learning Objective: 09-02 Account for cash short or over. Level: Medium Topic: Cash Receipts
9-60 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
73. Record the following transactions for the month of November 2013 on page 8 of a cash receipts journal. Total, prove, and rule the cash receipts journal as of November 30.
9-61 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-01 Record cash receipts in a cash receipts journal. Learning Objective: 09-02 Account for cash short or over. Level: Medium Topic: Cash Receipts
9-62 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
74. The cash receipts journal for Able Company is shown below. Describe how the amounts would be posted to the general ledger accounts.
Dr. Cash $7,812; Cr. Accounts Receivable $1,150; Cr. Sales Tax Payable $385; Cr. Sales $5,500; Cr. Supplies $30; Cr. Cash Over and Short $5; Cr. Notes Receivable $700; Cr. Interest Income $42
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 09-03 Post from the cash receipts journal to subsidiary and general ledgers. Level: Medium Topic: Cash Receipts
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
75. The cash receipts journal for Arlen Company is shown below. Describe how the amounts would be posted to the general ledger accounts.
Dr. Cash $8,630; Cr. Accounts Receivable $1,150; Cr. Sales Tax Payable $385; Cr. Sales $5,500; Cr. Cash Over and Short $5; Cr. Notes Receivable $1,500; Cr. Interest Income $90
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 09-03 Post from the cash receipts journal to subsidiary and general ledgers. Level: Medium Topic: Cash Receipts
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
76. The cash receipts journal for Carlson Company is shown below. Describe how the amounts would be posted to the accounts receivable subsidiary ledger accounts.
Cr. Accounts Receivable - A. Nord $350; Cr. Accounts Receivable - G. Rush $800;
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 09-03 Post from the cash receipts journal to subsidiary and general ledgers. Level: Medium Topic: Cash Receipts
9-65 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
77. The cash receipts journal for Engels Company is shown below. Describe how the amounts would be posted to the accounts receivable subsidiary ledger accounts.
Cr. Accounts Receivable - J. Dove $750; Cr. Accounts Receivable - R. Wright $1,200
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 09-03 Post from the cash receipts journal to subsidiary and general ledgers. Level: Medium Topic: Cash Receipts
9-66 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
78. Record the following transactions for the month of April 2013 on page 6 of a cash payments journal. Total, prove, and rule the cash payments journal as of April 30.
9-67 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-04 Record cash payments in a cash payments journal. Level: Hard Topic: Cash Payments
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
79. Record the following transactions for the month of June 2013 on page 6 of a cash payments journal. Total, prove, and rule the cash payments journal as of June 30.
9-69 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-04 Record cash payments in a cash payments journal. Level: Hard Topic: Cash Payments
9-70 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
80. Record the following transactions for the month of November 2013 on page 18 of a cash payments journal. Total, prove, and rule the cash payments journal as of November 30.
9-71 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 09-04 Record cash payments in a cash payments journal. Level: Hard Topic: Cash Payments
9-72 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
81. The cash payments journal for Excel Company is shown below. Describe how the amounts would be posted to the general ledger accounts.
Dr. Accounts Payable $1,200; Dr. Rent Expense $1,300; Dr. Petty Cash Fund $1,000; Dr. Notes Payable $2,000; Dr. Interest Expense $200; Cr. Purchase Discounts $12; Cr. Cash $5,688
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 09-05 Post from the cash payments journal to subsidiary and general ledgers. Level: Medium Topic: Cash Payments
9-73 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
82. On March 31, 2013, Home Decorating Pavilion received a bank statement with an ending balance of $9,750. The balance in the firm's checkbook and Cash account on the same date was $10,290. The difference between the two balances is caused by the items listed below.
Instructions: 1. Prepare a bank reconciliation statement for the firm as of March 31, 2013. 2. Record entries for any items on the bank reconciliation statement that must be journalized. Date the entries March 31, 2013. Use page 4 of a general journal.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
9-75 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 09-09 Reconcile the monthly bank statement. Learning Objective: 09-10 Record any adjusting entries required from the bank reconciliation. Level: Hard Topic: Banking Procedures
9-76 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
83. On December 31, 2013, Designer's Warehouse received a bank statement with an ending balance of $19,500. The balance in the firm's checkbook and Cash account on the same date was $20,580. The difference between the two balances is caused by the items listed below.
Instructions: 1. Prepare a bank reconciliation statement for the firm as of December 31, 2013. 2. Record entries for any items on the bank reconciliation statement that must be journalized. Date the entries December 31, 2013. Use page 19 of a general journal.
9-77 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
9-78 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 09-09 Reconcile the monthly bank statement. Learning Objective: 09-10 Record any adjusting entries required from the bank reconciliation. Level: Hard Topic: Banking Procedures
9-79 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
Essay Questions
84. Match the accounting terms with the description by entering the proper letter in the space provided.
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Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
(1) D, (2) C, (3) G, (4) Z, (5) DD, (6) W, (7) R, (8) F, (9) AA, (10) H, (11) Q, (12) Y, (13) I, (14) V, (15) J
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-01 Record cash receipts in a cash receipts journal. Learning Objective: 09-02 Account for cash short or over. Learning Objective: 09-03 Post from the cash receipts journal to subsidiary and general ledgers. Learning Objective: 09-04 Record cash payments in a cash payments journal. Learning Objective: 09-05 Post from the cash payments journal to subsidiary and general ledgers. Learning Objective: 09-06 Demonstrate a knowledge of procedures for a petty cash fund. Learning Objective: 09-07 Demonstrate a knowledge of internal control procedures for cash. Learning Objective: 09-08 Write a check; endorse checks; prepare a bank deposit slip; and maintain a checkbook balance. Learning Objective: 09-09 Reconcile the monthly bank statement. Learning Objective: 09-10 Record any adjusting entries required from the bank reconciliation. Learning Objective: 09-11 Understand how businesses use online banking to manage cash activities. Level: Medium Topic: Banking Procedures Topic: Cash Payments Topic: Cash Receipts
9-81 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
85. Match the accounting terms with the description by entering the proper letter in the space provided.
9-82 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 09 - Cash Receipts, Cash Payments, and Banking Procedures
(1) P, (2) K, (3) L, (4) S, (5) E, (6) O, (7) M, (8) N, (9) A, (10) CC, (11) X, (12) B, (13) T, (14) U, (15) BB
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 09-01 Record cash receipts in a cash receipts journal. Learning Objective: 09-02 Account for cash short or over. Learning Objective: 09-03 Post from the cash receipts journal to subsidiary and general ledgers. Learning Objective: 09-04 Record cash payments in a cash payments journal. Learning Objective: 09-05 Post from the cash payments journal to subsidiary and general ledgers. Learning Objective: 09-06 Demonstrate a knowledge of procedures for a petty cash fund. Learning Objective: 09-07 Demonstrate a knowledge of internal control procedures for cash. Learning Objective: 09-08 Write a check; endorse checks; prepare a bank deposit slip; and maintain a checkbook balance. Learning Objective: 09-09 Reconcile the monthly bank statement. Learning Objective: 09-10 Record any adjusting entries required from the bank reconciliation. Learning Objective: 09-11 Understand how businesses use online banking to manage cash activities. Level: Medium Topic: Banking Procedures Topic: Cash Payments Topic: Cash Receipts
9-83 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
Chapter 10 Payroll Computations, Records, and Payment True / False Questions
1. The Medicare tax is levied to provide medical care for the employee and the employee's spouse after they reach age 65. True False
2. The maximum base for the social security tax is the same as that for the Medicare tax. True False
3. The overtime rate is one and one-half times the regular hourly rate. True False
4. The gross pay of an hourly employee is determined by subtracting the overtime premium from the regular earnings. True False
5. Time sheets or time cards are used to keep a record of hours worked each day by each employee paid on an hourly basis. True False
6. If an employee whose regular hourly rate is $9 and whose overtime rate is 1.5 times the regular rate works 42 hours in one week, the employee's gross pay is $378. True False
7. Earnings in excess of the social security base amount are not taxed. True False
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Chapter 10 - Payroll Computations, Records, and Payment
8. If an employee works for more than one employer during the year, the social security tax is deducted and matched by only one employer. True False
9. Employees submit Form W-4 to their employers to show the number of withholding allowances they claim for federal income tax withholding purposes. True False
10. Publication 15, Circular E contains federal income tax withholding tables. True False
11. The employee's marital status is one factor that determines the amount of federal income tax withheld by the employer. True False
12. Withholding for federal income taxes places employees on a pay-as-you-go basis. True False
13. Salaried employees who hold supervisory or managerial positions generally are not subject to wage and hour laws. True False
14. When a firm records its payroll, the amount of federal income tax withheld from employees is entered as a liability. True False
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Chapter 10 - Payroll Computations, Records, and Payment
15. The net amount due employees for their wages is recorded as a debit to Salaries and Wages Payable. True False
Fill in the Blank Questions
16. Employees of firms engaged in interstate commerce must receive an overtime rate of at least 1.5 times the regular hourly rate of pay for time worked in excess of ____________________ hours per week. ________________________________________
17. FICA tax is commonly referred to as ____________________ tax. ________________________________________
18. One who is hired by an employer and who is under the control and direction of the employer is called a(n) ___________________. ________________________________________
19. An independent ____________________ is paid by the company to carry out a specific task or job but is not under the direct supervision, control, and direction of the company. ________________________________________
20. Employers are required to pay workers' ____________________ insurance that will reimburse employees for losses suffered from job-related injuries. ________________________________________
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Chapter 10 - Payroll Computations, Records, and Payment
21. An employee whose regular hourly rate is $12 and whose overtime rate is 1.5 times the regular rate worked 45 hours in one week. The employer should record an overtime premium of ____________________ in the payroll register. ________________________________________
22. Salespeople who are paid a percentage of net sales are paid on the basis of ___________________. ________________________________________
23. If employees in a manufacturing business are paid wages based on the number of units produced, they are paid on the ____________________ basis. ________________________________________
24. Because salaried employees who hold supervisory or managerial positions generally are not subject to wage and hour laws, they are known as ____________________ employees. ________________________________________
25. A worker who is paid an agreed amount for each week or month or year is said to be paid on a(n) ____________________ basis. ________________________________________
26. After payroll computations are made, the hours worked, rates, earnings, and deductions are entered into a record called a(n) ___________________. ________________________________________
27. To compute ____________________ pay, it is necessary to subtract the total of an employee's deductions from the employee's gross pay. ________________________________________
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Chapter 10 - Payroll Computations, Records, and Payment
28. The employer records the amount of federal income taxes withheld from employees in the Employee Income Tax ____________________ account. ________________________________________
29. The amount of employees' ____________________ pay is recorded in the Wages Expense account. ________________________________________
30. The details that are entered on the employee's individual earnings record for each pay period are obtained from the _______________________. ________________________________________
Multiple Choice Questions
31. Which of the following statements is not correct? A. The amount of social security tax withheld depends on an employee's gross earnings, marital status, and number of withholding allowances. B. Federal law requires that social security, Medicare, and federal income taxes be deducted from the gross pay of most employees. C. Medicare taxes are levied in an equal amount on both employers and employees. D. Once an employee's year-to-date wages reach a certain amount prescribed by law, social security tax is no longer withheld.
32. Which of the following statements is correct? A. A company is required to withhold various employee taxes from amounts paid independent contractors. B. The accountant who performs the independent audit for a company is an employee of the company. C. All employees must be paid at the minimum wage rate set by the Fair Labor Standards Act. D. Disability benefits for the worker and the worker's dependents are provided by the Federal Insurance Contributions Act.
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Chapter 10 - Payroll Computations, Records, and Payment
33. Which of the following statements is correct? A. The FUTA tax provides benefits for employees who become unemployed. B. The federal unemployment tax rate can be reduced by the rate charged by state for the state unemployment tax. C. The earnings base for the federal and state unemployment taxes are the same, the first $7,000 of an employee's earnings for the year. D. All of the above are correct.
34. The employer records the amount of federal income tax withheld from employees as A. Income Tax Expense. B. Employee Federal Income Tax Payable. C. Social Security Tax Expense. D. Social Security Tax Payable.
35. Federal law requires that the employer withhold _________ from the employee's pay. A. federal income tax, social security tax, Medicare tax, and FUTA B. federal income tax, social security tax, and Medicare tax C. federal income tax, social security tax, Medicare tax, and state and local taxes D. Federal and state income tax, social security tax, Medicare tax, and FUTA
36. An employee whose regular hourly rate is $10 and whose overtime rate is 1.5 times the regular rate worked 44 hours in one week. In the payroll register, the employer should record an overtime premium of A. $440. B. $220. C. $20. D. $5.
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Chapter 10 - Payroll Computations, Records, and Payment
37. An employee whose regular hourly rate is $20 and whose overtime rate is 1.5 times the regular rate worked 44 hours in one week. In the payroll register, the employer should record an overtime premium of A. $880. B. $440. C. $120. D. $40.
38. An employee whose regular hourly rate is $10 and whose overtime rate is 1.5 times the regular rate worked 48 hours in one week. In the payroll register, the employer should record an overtime premium of A. $480. B. $240. C. $80. D. $40.
39. Salespeople who are paid a percentage of net sales are paid on A. commission basis. B. salary basis. C. hourly-rate basis. D. piece-rate basis.
40. An employee whose regular hourly rate is $9 and whose overtime rate is 1.5 times the regular rate worked 44 hours one week. The employee's gross pay was A. $378. B. $396. C. $414. D. $594.
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Chapter 10 - Payroll Computations, Records, and Payment
41. An employee whose regular hourly rate is $18 and whose overtime rate is 1.5 times the regular rate worked 44 hours one week. The employee's gross pay was A. $1,188. B. $828. C. $792. D. $756.
42. Which of the following is a factor in the determination of the amount of social security tax to withhold from an employee's pay? A. hours worked during the pay period B. marital status C. withholding allowances claimed on Form W-4 D. gross wages
43. Assuming a Medicare tax rate of 1.45% and monthly gross wages of $2,500, the amount recorded in Medicare Tax Payable for one quarter for the employee's payroll deduction is A. a debit for $36.25. B. a credit for $36.25. C. a debit for $108.75. D. a credit for $108.75.
44. Assuming a Medicare tax rate of 1.45% and monthly gross wages of $5,000, the amount recorded in Medicare Tax Payable for one quarter for the employee's payroll deduction is A. a debit for $217.50. B. a credit for $217.50. C. a debit for $72.50. D. a credit for $72.50.
45. Publication 15, Circular E contains withholding information A. for social security and Medicare taxes only. B. for federal income taxes only. C. for social security, Medicare, and federal income tax taxes. D. for federal and state income taxes.
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Chapter 10 - Payroll Computations, Records, and Payment
46. Lisa Ramos has a regular hourly rate of $10.75. In a week when she worked 40 hours and had deductions of $55 for federal income tax, $26.75 for social security tax, and $6.25 for Medicare tax, her net pay was A. $430. B. $342. C. $375. D. $397.
47. Lacy Crawford has a regular hourly rate of $21.50. In a week when she worked 40 hours and had deductions of $110 for federal income tax, $53.50 for social security tax, and $12.50 for Medicare tax, her net pay was A. $860. B. $684. C. $750. D. $794.
48. Jason McCurdy has a regular hourly rate of $10.75. During a two week period, he worked 80 hours and had deductions of $110 for federal income tax, $53.50 for social security tax, and $12.50 for Medicare tax. His net pay was A. $860. B. $684. C. $750. D. $794.
49. The Social Security Tax Payable account will normally have a(n) A. debit balance. B. credit balance. C. debit or credit balance depending on the timing of payments. D. zero balance.
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Chapter 10 - Payroll Computations, Records, and Payment
50. The column totals in a payroll register A. are used in the journal entry to record the payroll. B. are posted directly to the general ledger accounts. C. are unnecessary. D. are neither recorded in a journal entry nor posted to the general ledger accounts.
51. The amount debited to Wages Expense when a payroll is recorded is the A. regular gross earnings. B. earnings after taxes. C. net earnings. D. total gross earnings.
52. When checks are issued to employees after the entry to record the payroll has been made, the accountant would A. debit Salaries Expense, debit Wages Expense, and credit Cash. B. debit Salaries and Wages Payable, debit Social Security Tax Payable, debit Medicare Tax Payable, debit Employee Income Tax Payable, and credit Cash. C. debit Salaries and Wages Payable and credit Cash. D. debit Salaries and Wages Payable and credit Salaries Expense and Wages Expense.
53. Each type of deduction made from the employees' earnings is recorded in a separate A. asset account. B. expense account. C. liability account. D. revenue account.
54. It is best not to pay wages and salaries by A. cash. B. a check from the regular cash account. C. the direct-deposit method. D. a check from the payroll cash account.
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Chapter 10 - Payroll Computations, Records, and Payment
55. All details related to an employee's earnings, deductions, and net pay throughout the year would be found in A. the payroll register. B. the individual earnings record. C. the general journal. D. the Wages Expense account in the general ledger.
56. Sabrina Duncan had gross earnings for the pay period ending 10/15/13 of $5,785. Her total gross earnings as of 9/30/13 were $104,500. If Social Security taxes are 6.2% on a maximum earnings of $106,800 per year, Sabrina's Social Security withheld from her 10/15/13 paycheck would be: A. $358.67 B. $142.60 C. $216.07 D. $198.88
57. For which of the following taxes is there no limit on the amount of annual earnings subject to the tax? A. Federal unemployment compensation tax B. Social Security tax C. Federal income tax D. State unemployment compensation tax
58. The Payroll Tax Expense account is used to record which of the following taxes? A. Federal unemployment compensation tax B. Federal Income Tax C. State Income Taxes D. Sales Taxes
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Chapter 10 - Payroll Computations, Records, and Payment
59. Jill Monroe earns $25 per hour. She worked 48 hours this pay period and receives timeand-a-half for any hours worked over 40 hours per week. Jill's gross earnings are: A. $1,200 B. $1,300 C. $1,100 D. $1,920
60. Which of the following is NOT typically an employee payroll withholding? A. federal income taxes B. state unemployment taxes C. union dues D. medical insurance
61. The employer records the amount of federal income tax withheld as: A. an asset. B. a payroll tax expense. C. a liability. D. an expense.
62. FICA taxes are paid by: A. employees only. B. employer and federal government. C. both the employee and employer. D. neither the employee nor employer.
63. Rick O'Shea, the only employee of Hunter Furniture Company, makes $30,000 per year and is paid once a month. For the month of July, his federal income taxes withheld are $180, state income taxes withheld are $37, social security is 6.2%, Medicare tax is 1.45%, State Unemployment Tax is 4%, and Federal Unemployment tax is .8%. What is Rick's net pay for July? A. $2,500.00 B. $2,283.00 C. $2,308.75 D. $2,091.75
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Chapter 10 - Payroll Computations, Records, and Payment
64. Rick O'Shea, the only employee of Hunter Furniture Company, makes $30,000 per year and is paid once a month. For the month of July, his federal income taxes withheld are $180, state income taxes withheld are $37, social security is 6.2%, Medicare tax is 1.45%, State Unemployment Tax is 4%, and Federal Unemployment tax is .8%. What is the total amount of employer payroll taxes for the month of July for Hunter Furniture Company? (Assume all earnings are subject to employer payroll taxes.) A. $311.25 B. $120.00 C. $191.25 D. $155.00
65. The total amount earned by the employee is called the A. gross pay B. take home pay C. net pay D. payroll
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Chapter 10 - Payroll Computations, Records, and Payment
Short Answer Questions
66. During one week, three employees of the Snowshoe Lodge worked the number of hours shown below. All these employees receive overtime pay at one and a half times their regular hourly rate for any hours worked beyond 40 in a week. Compute the regular earnings, overtime earnings, and gross pay for each employee.
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Chapter 10 - Payroll Computations, Records, and Payment
67. During one week, three employees of the Tea Leaf Cafe worked the number of hours shown below. All these employees receive overtime pay at one and a half times their regular hourly rate for any hours worked beyond 40 in a week. Compute the regular earnings, overtime earnings, and gross pay for each employee.
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Chapter 10 - Payroll Computations, Records, and Payment
68. During one week, three employees of the Pampered Pooch Pet Salon worked the number of hours shown below. All these employees receive overtime pay at one and a half times their regular hourly rate for any hours worked beyond 40 in a week. Compute the regular earnings, overtime earnings, and gross pay for each employee.
69. During one week, three employees of the Siesta Inn worked the number of hours shown below. All these employees receive overtime pay at one and a half times their regular hourly rate for any hours worked beyond 40 in a week. Compute the regular earnings, overtime earnings, and gross pay for each employee.
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Chapter 10 - Payroll Computations, Records, and Payment
70. The monthly salaries for December and the year-to-date earnings as of November 30 for the three employees of the Lakeview Medical Center are listed below. Compute the amount of social security tax and Medicare tax to be withheld from each of the employee's gross pay for December. Assume a 6.2 percent social security tax rate and a base of $106,800 for the calendar year. Assume a 1.45 percent Medicare tax rate.
71. The monthly salaries for December and the year-to-date earnings as of November 30 for the three employees of the Design Warehouse are listed below. Compute the amount of social security tax and Medicare tax to be withheld from each of the employee's gross pay for December. Assume a 6.2 percent social security tax rate and a base of $106,800 for the calendar year. Assume a 1.45 percent Medicare tax rate.
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Chapter 10 - Payroll Computations, Records, and Payment
72. The monthly salaries for December and the year-to-date earnings as of November 30 for the three employees of the Barbara's Bookstore, Inc. are listed below. Compute the amount of social security tax and Medicare tax to be withheld from each of the employee's gross pay for December. Assume a 6.2 percent social security tax rate and a base of $106,800 for the calendar year. Assume a 1.45 percent Medicare tax rate.
73. The monthly salaries for December and the year-to-date earnings as of November 30 for the three employees of Heather's Hair Salon are listed below. Compute the amount of social security tax and Medicare tax to be withheld from each of the employee's gross pay for December. Assume a 6.2 percent social security tax rate and a base of $106,800 for the calendar year. Assume a 1.45 percent Medicare tax rate.
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Chapter 10 - Payroll Computations, Records, and Payment
74. During the week ended May 15, 2013, Scott Fairchild worked 40 hours. His regular hourly rate is $14. Assume that his earnings are subject to social security tax at a rate of 6.2 percent and Medicare tax at a rate of 1.45 percent. He also has deductions of $31 for federal income tax and $21 for health insurance. A) What is his gross pay for the week? B) What is the total of his deductions for the week? C) What is his net pay for the week?
75. During the week ended January 11, 2013, Darlene Marcussen worked 40 hours. Her regular hourly rate is $18. Assume that her earnings are subject to social security tax at a rate of 6.2 percent and Medicare tax at a rate of 1.45 percent. She also has deductions of $40 for federal income tax and $21 for health insurance. A) What is her gross pay for the week? B) What is the total of her deductions for the week? C) What is her net pay for the week?
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Chapter 10 - Payroll Computations, Records, and Payment
76. During the week ended February 8, 2013, Stuart Wayne worked 40 hours. His regular hourly rate is $10. Assume that his earnings are subject to social security tax at a rate of 6.2 percent and Medicare tax at a rate of 1.45 percent. He also has deductions of $31 for federal income tax and $21 for health insurance. A) What is his gross pay for the week? B) What is the total of his deductions for the week? C) What is his net pay for the week?
77. During the week ended April 26, 2013, Andy Tyler worked 40 hours. His regular hourly rate is $15. Assume that his earnings are subject to social security tax at a rate of 6.2 percent and Medicare tax at a rate of 1.45 percent. He also has deductions of $31 for federal income tax and $21 for health insurance. A) What is his gross pay for the week? B) What is the total of his deductions for the week? C) What is his net pay for the week?
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Chapter 10 - Payroll Computations, Records, and Payment
78. The Rollins Company has office employees and shipping employees. A summary of their earnings and deductions for the week ended June 14, 2013, is shown below. On page 6 of a general journal, record the June 14 payroll and the entry to summarize the effect of the checks written to pay the payroll.
79. The Royal Company has office employees and sales employees. A summary of their earnings and deductions for the week ended April 26, 2013, is shown below. On page 18 of a general journal, record the April 26 payroll and the entry to summarize the effect of the checks written to pay the payroll.
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Chapter 10 - Payroll Computations, Records, and Payment
80. The Burns Company has two office employees and two shipping employees. A summary of their earnings and deductions for the week ended August 23, 2013, is shown below. On page 10 of a general journal, record the August 23 payroll and the entry to summarize the effect of the checks written to pay the payroll.
81. The Santa Fe Company has office employees and shipping employees. A summary of their earnings and deductions for the week ended July 12, 2013, is shown below. On page 16 of a general journal, record the July 12 payroll and the entry to summarize the effect of the checks written to pay the payroll.
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Chapter 10 - Payroll Computations, Records, and Payment
Matching Questions
82. Match the accounting terms with the description by entering the proper number. 1. A record of payroll information for each Social Security (FICA) employee for the pay period Tax ____ 2. A person who is hired by and works under the control and direction of the employer Commission basis ____ 3. A form used to claim exemption (withholding) allowances Salary basis ____ 4. A tax imposed by the Federal Insurance Contributions Act and collected on employee earnings to provide retirement and disability Individual earnings benefits record ____ 5. A method of paying employees according to a stated rate per hour Social Security Act ____ 6. Salaried employees who hold supervisory or managerial positions who are not subject to the maximum hour and overtime pay provisions of the Wage and Hour Law Tax-exempt wages ____ 7. A method of paying employees according to an agreed-upon amount for each week or month Hourly rate basis ____ 8. A tax levied on employees and employers to provide medical care for the employee and the employee's spouse after each has reached age 65 Exempt employees ____ 9. Taxes levied by a state government against employers to benefit unemployed workers Compensation record ____ 10. A federal act providing certain benefits for employees and their families; officially the Workers' compensation Federal Insurance Contributions Act insurance ____ 11. Taxes levied by the federal government against employers to benefit unemployed workers Time and a half ____ 12. A method of paying employees according to a percentage of net sales Employee ____ 13. Rate of pay for an employee's work in excess of 40 hours a week Medicare tax ____ 14. Earnings in excess of the base amount set by the Social Security Act Payroll register ____ 15. Insurance that protects employees against losses from job-related injuries or illnesses, or Employee's withholding compensates their families if death occurs in Allowance certificate the course of the employment (Form W-4) ____
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Chapter 10 - Payroll Computations, Records, and Payment
16. One who is paid by a company to carry out a specific task or job but is not under the direct supervision or control of the company 17. An employee record that contains information needed to compute earnings and complete tax reports 18. Another name for individual earnings record 19. A method of paying employees according to the number of units produced 20. A simple method to determine the amount of federal income tax to be withheld using a table provided by the government
Independent contractor ____ State unemployment taxes ____ Piece-rate basis ____ Federal unemployment taxes ____ Wage-bracket table method ____
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Chapter 10 - Payroll Computations, Records, and Payment
Chapter 10 Payroll Computations, Records, and Payment Answer Key
True / False Questions
1. The Medicare tax is levied to provide medical care for the employee and the employee's spouse after they reach age 65. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-01 Explain the major federal laws relating to employee earnings and withholding. Level: Medium Topic: Payroll Laws and Taxes
2. The maximum base for the social security tax is the same as that for the Medicare tax. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-01 Explain the major federal laws relating to employee earnings and withholding. Level: Medium Topic: Payroll Laws and Taxes
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Chapter 10 - Payroll Computations, Records, and Payment
3. The overtime rate is one and one-half times the regular hourly rate. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-01 Explain the major federal laws relating to employee earnings and withholding. Level: Medium Topic: Payroll Laws and Taxes
4. The gross pay of an hourly employee is determined by subtracting the overtime premium from the regular earnings. FALSE
AACSB: Analytic AICPA BB: Resource Management Bloom's: Understand Learning Objective: 10-02 Compute gross earnings of employees. Level: Easy Topic: Calculating Earnings and Taxes
5. Time sheets or time cards are used to keep a record of hours worked each day by each employee paid on an hourly basis. TRUE
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 10-02 Compute gross earnings of employees. Level: Medium Topic: Calculating Earnings and Taxes
6. If an employee whose regular hourly rate is $9 and whose overtime rate is 1.5 times the regular rate works 42 hours in one week, the employee's gross pay is $378. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 10-02 Compute gross earnings of employees. Level: Medium Topic: Calculating Earnings and Taxes
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Chapter 10 - Payroll Computations, Records, and Payment
7. Earnings in excess of the social security base amount are not taxed. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-03 Determine employee deductions for social security tax. Level: Medium Topic: Calculating Earnings and Taxes
8. If an employee works for more than one employer during the year, the social security tax is deducted and matched by only one employer. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-03 Determine employee deductions for social security tax. Level: Medium Topic: Calculating Earnings and Taxes
9. Employees submit Form W-4 to their employers to show the number of withholding allowances they claim for federal income tax withholding purposes. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-05 Determine employee deductions for income tax. Level: Medium Topic: Calculating Earnings and Taxes
10. Publication 15, Circular E contains federal income tax withholding tables. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-05 Determine employee deductions for income tax. Level: Medium Topic: Calculating Earnings and Taxes
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Chapter 10 - Payroll Computations, Records, and Payment
11. The employee's marital status is one factor that determines the amount of federal income tax withheld by the employer. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-05 Determine employee deductions for income tax. Level: Medium Topic: Calculating Earnings and Taxes
12. Withholding for federal income taxes places employees on a pay-as-you-go basis. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-05 Determine employee deductions for income tax. Level: Medium Topic: Calculating Earnings and Taxes
13. Salaried employees who hold supervisory or managerial positions generally are not subject to wage and hour laws. TRUE
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 10-05 Determine employee deductions for income tax. Level: Medium Topic: Calculating Earnings and Taxes
14. When a firm records its payroll, the amount of federal income tax withheld from employees is entered as a liability. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Easy Topic: Recording Payroll Information
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Chapter 10 - Payroll Computations, Records, and Payment
15. The net amount due employees for their wages is recorded as a debit to Salaries and Wages Payable. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Easy Topic: Recording Payroll Information
Fill in the Blank Questions
16. Employees of firms engaged in interstate commerce must receive an overtime rate of at least 1.5 times the regular hourly rate of pay for time worked in excess of ____________________ hours per week. 40
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-01 Explain the major federal laws relating to employee earnings and withholding. Level: Easy Topic: Payroll Laws and Taxes
17. FICA tax is commonly referred to as ____________________ tax. social security
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-01 Explain the major federal laws relating to employee earnings and withholding. Level: Easy Topic: Payroll Laws and Taxes
10-29 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
18. One who is hired by an employer and who is under the control and direction of the employer is called a(n) ___________________. employee
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 10-01 Explain the major federal laws relating to employee earnings and withholding. Level: Easy Topic: Payroll Laws and Taxes
19. An independent ____________________ is paid by the company to carry out a specific task or job but is not under the direct supervision, control, and direction of the company. contractor
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 10-01 Explain the major federal laws relating to employee earnings and withholding. Level: Easy Topic: Payroll Laws and Taxes
20. Employers are required to pay workers' ____________________ insurance that will reimburse employees for losses suffered from job-related injuries. compensation
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-01 Explain the major federal laws relating to employee earnings and withholding. Level: Easy Topic: Payroll Laws and Taxes
10-30 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
21. An employee whose regular hourly rate is $12 and whose overtime rate is 1.5 times the regular rate worked 45 hours in one week. The employer should record an overtime premium of ____________________ in the payroll register. $30
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-02 Compute gross earnings of employees. Level: Easy Topic: Calculating Earnings and Taxes
22. Salespeople who are paid a percentage of net sales are paid on the basis of ___________________. commissions
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 10-02 Compute gross earnings of employees. Level: Easy Topic: Calculating Earnings and Taxes
23. If employees in a manufacturing business are paid wages based on the number of units produced, they are paid on the ____________________ basis. piece-rate
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 10-02 Compute gross earnings of employees. Level: Easy Topic: Calculating Earnings and Taxes
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Chapter 10 - Payroll Computations, Records, and Payment
24. Because salaried employees who hold supervisory or managerial positions generally are not subject to wage and hour laws, they are known as ____________________ employees. exempt
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-05 Determine employee deductions for income tax. Level: Easy Topic: Calculating Earnings and Taxes
25. A worker who is paid an agreed amount for each week or month or year is said to be paid on a(n) ____________________ basis. salary
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 10-05 Determine employee deductions for income tax. Level: Easy Topic: Calculating Earnings and Taxes
26. After payroll computations are made, the hours worked, rates, earnings, and deductions are entered into a record called a(n) ___________________. payroll register
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 10-06 Enter gross earnings; deductions; and net pay in the payroll register. Level: Easy Topic: Calculating Earnings and Taxes
27. To compute ____________________ pay, it is necessary to subtract the total of an employee's deductions from the employee's gross pay. net
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 10-06 Enter gross earnings; deductions; and net pay in the payroll register. Level: Easy Topic: Calculating Earnings and Taxes
10-32 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
28. The employer records the amount of federal income taxes withheld from employees in the Employee Income Tax ____________________ account. Payable
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Easy Topic: Recording Payroll Information
29. The amount of employees' ____________________ pay is recorded in the Wages Expense account. gross
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Easy Topic: Recording Payroll Information
30. The details that are entered on the employee's individual earnings record for each pay period are obtained from the _______________________. payroll register
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 10-06 Enter gross earnings; deductions; and net pay in the payroll register. Level: Easy Topic: Calculating Earnings and Taxes
10-33 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
Multiple Choice Questions
31. Which of the following statements is not correct? A. The amount of social security tax withheld depends on an employee's gross earnings, marital status, and number of withholding allowances. B. Federal law requires that social security, Medicare, and federal income taxes be deducted from the gross pay of most employees. C. Medicare taxes are levied in an equal amount on both employers and employees. D. Once an employee's year-to-date wages reach a certain amount prescribed by law, social security tax is no longer withheld.
AACSB: Analytic AICPA BB: Legal Bloom's: Analyze Learning Objective: 10-01 Explain the major federal laws relating to employee earnings and withholding. Level: Medium Topic: Payroll Laws and Taxes
32. Which of the following statements is correct? A. A company is required to withhold various employee taxes from amounts paid independent contractors. B. The accountant who performs the independent audit for a company is an employee of the company. C. All employees must be paid at the minimum wage rate set by the Fair Labor Standards Act. D. Disability benefits for the worker and the worker's dependents are provided by the Federal Insurance Contributions Act.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Analyze Learning Objective: 10-01 Explain the major federal laws relating to employee earnings and withholding. Level: Medium Topic: Payroll Laws and Taxes
10-34 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
33. Which of the following statements is correct? A. The FUTA tax provides benefits for employees who become unemployed. B. The federal unemployment tax rate can be reduced by the rate charged by state for the state unemployment tax. C. The earnings base for the federal and state unemployment taxes are the same, the first $7,000 of an employee's earnings for the year. D. All of the above are correct.
AACSB: Analytic AICPA BB: Legal Bloom's: Analyze Learning Objective: 10-01 Explain the major federal laws relating to employee earnings and withholding. Level: Medium Topic: Payroll Laws and Taxes
34. The employer records the amount of federal income tax withheld from employees as A. Income Tax Expense. B. Employee Federal Income Tax Payable. C. Social Security Tax Expense. D. Social Security Tax Payable.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Easy Topic: Recording Payroll Information
35. Federal law requires that the employer withhold _________ from the employee's pay. A. federal income tax, social security tax, Medicare tax, and FUTA B. federal income tax, social security tax, and Medicare tax C. federal income tax, social security tax, Medicare tax, and state and local taxes D. Federal and state income tax, social security tax, Medicare tax, and FUTA
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-01 Explain the major federal laws relating to employee earnings and withholding. Level: Easy Topic: Payroll Laws and Taxes
10-35 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
36. An employee whose regular hourly rate is $10 and whose overtime rate is 1.5 times the regular rate worked 44 hours in one week. In the payroll register, the employer should record an overtime premium of A. $440. B. $220. C. $20. D. $5.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-02 Compute gross earnings of employees. Level: Medium Topic: Calculating Earnings and Taxes
37. An employee whose regular hourly rate is $20 and whose overtime rate is 1.5 times the regular rate worked 44 hours in one week. In the payroll register, the employer should record an overtime premium of A. $880. B. $440. C. $120. D. $40.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-02 Compute gross earnings of employees. Level: Medium Topic: Calculating Earnings and Taxes
10-36 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
38. An employee whose regular hourly rate is $10 and whose overtime rate is 1.5 times the regular rate worked 48 hours in one week. In the payroll register, the employer should record an overtime premium of A. $480. B. $240. C. $80. D. $40.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-02 Compute gross earnings of employees. Level: Medium Topic: Calculating Earnings and Taxes
39. Salespeople who are paid a percentage of net sales are paid on A. commission basis. B. salary basis. C. hourly-rate basis. D. piece-rate basis.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 10-02 Compute gross earnings of employees. Level: Easy Topic: Calculating Earnings and Taxes
40. An employee whose regular hourly rate is $9 and whose overtime rate is 1.5 times the regular rate worked 44 hours one week. The employee's gross pay was A. $378. B. $396. C. $414. D. $594.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-02 Compute gross earnings of employees. Level: Easy Topic: Calculating Earnings and Taxes
10-37 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
41. An employee whose regular hourly rate is $18 and whose overtime rate is 1.5 times the regular rate worked 44 hours one week. The employee's gross pay was A. $1,188. B. $828. C. $792. D. $756.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-02 Compute gross earnings of employees. Level: Easy Topic: Calculating Earnings and Taxes
42. Which of the following is a factor in the determination of the amount of social security tax to withhold from an employee's pay? A. hours worked during the pay period B. marital status C. withholding allowances claimed on Form W-4 D. gross wages
AACSB: Analytic AICPA BB: Legal Bloom's: Analyze Learning Objective: 10-03 Determine employee deductions for social security tax. Level: Medium Topic: Calculating Earnings and Taxes
43. Assuming a Medicare tax rate of 1.45% and monthly gross wages of $2,500, the amount recorded in Medicare Tax Payable for one quarter for the employee's payroll deduction is A. a debit for $36.25. B. a credit for $36.25. C. a debit for $108.75. D. a credit for $108.75.
AACSB: Analytic AICPA BB: Legal Bloom's: Apply Learning Objective: 10-04 Determine Employee Deductions For Medicare Tax. Level: Medium Topic: Calculating Earnings and Taxes
10-38 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
44. Assuming a Medicare tax rate of 1.45% and monthly gross wages of $5,000, the amount recorded in Medicare Tax Payable for one quarter for the employee's payroll deduction is A. a debit for $217.50. B. a credit for $217.50. C. a debit for $72.50. D. a credit for $72.50.
AACSB: Analytic AICPA BB: Legal Bloom's: Apply Learning Objective: 10-04 Determine Employee Deductions For Medicare Tax. Level: Medium Topic: Calculating Earnings and Taxes
45. Publication 15, Circular E contains withholding information A. for social security and Medicare taxes only. B. for federal income taxes only. C. for social security, Medicare, and federal income tax taxes. D. for federal and state income taxes.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-05 Determine employee deductions for income tax. Level: Medium Topic: Calculating Earnings and Taxes
46. Lisa Ramos has a regular hourly rate of $10.75. In a week when she worked 40 hours and had deductions of $55 for federal income tax, $26.75 for social security tax, and $6.25 for Medicare tax, her net pay was A. $430. B. $342. C. $375. D. $397.
AACSB: Analytic AICPA BB: Legal Bloom's: Apply Learning Objective: 10-06 Enter gross earnings; deductions; and net pay in the payroll register. Level: Easy Topic: Calculating Earnings and Taxes
10-39 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
47. Lacy Crawford has a regular hourly rate of $21.50. In a week when she worked 40 hours and had deductions of $110 for federal income tax, $53.50 for social security tax, and $12.50 for Medicare tax, her net pay was A. $860. B. $684. C. $750. D. $794.
AACSB: Analytic AICPA BB: Legal Bloom's: Apply Learning Objective: 10-06 Enter gross earnings; deductions; and net pay in the payroll register. Level: Easy Topic: Calculating Earnings and Taxes
48. Jason McCurdy has a regular hourly rate of $10.75. During a two week period, he worked 80 hours and had deductions of $110 for federal income tax, $53.50 for social security tax, and $12.50 for Medicare tax. His net pay was A. $860. B. $684. C. $750. D. $794.
AACSB: Analytic AICPA BB: Legal Bloom's: Apply Learning Objective: 10-06 Enter gross earnings; deductions; and net pay in the payroll register. Level: Easy Topic: Calculating Earnings and Taxes
49. The Social Security Tax Payable account will normally have a(n) A. debit balance. B. credit balance. C. debit or credit balance depending on the timing of payments. D. zero balance.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Easy Topic: Recording Payroll Information
10-40 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
50. The column totals in a payroll register A. are used in the journal entry to record the payroll. B. are posted directly to the general ledger accounts. C. are unnecessary. D. are neither recorded in a journal entry nor posted to the general ledger accounts.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Easy Topic: Recording Payroll Information
51. The amount debited to Wages Expense when a payroll is recorded is the A. regular gross earnings. B. earnings after taxes. C. net earnings. D. total gross earnings.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Medium Topic: Recording Payroll Information
52. When checks are issued to employees after the entry to record the payroll has been made, the accountant would A. debit Salaries Expense, debit Wages Expense, and credit Cash. B. debit Salaries and Wages Payable, debit Social Security Tax Payable, debit Medicare Tax Payable, debit Employee Income Tax Payable, and credit Cash. C. debit Salaries and Wages Payable and credit Cash. D. debit Salaries and Wages Payable and credit Salaries Expense and Wages Expense.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Medium Topic: Recording Payroll Information
10-41 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
53. Each type of deduction made from the employees' earnings is recorded in a separate A. asset account. B. expense account. C. liability account. D. revenue account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Easy Topic: Recording Payroll Information
54. It is best not to pay wages and salaries by A. cash. B. a check from the regular cash account. C. the direct-deposit method. D. a check from the payroll cash account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Easy Topic: Recording Payroll Information
55. All details related to an employee's earnings, deductions, and net pay throughout the year would be found in A. the payroll register. B. the individual earnings record. C. the general journal. D. the Wages Expense account in the general ledger.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Understand Learning Objective: 10-08 Maintain An Earnings Record For Each Employee. Level: Medium Topic: Recording Payroll Information
10-42 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
56. Sabrina Duncan had gross earnings for the pay period ending 10/15/13 of $5,785. Her total gross earnings as of 9/30/13 were $104,500. If Social Security taxes are 6.2% on a maximum earnings of $106,800 per year, Sabrina's Social Security withheld from her 10/15/13 paycheck would be: A. $358.67 B. $142.60 C. $216.07 D. $198.88
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 10-03 Determine employee deductions for social security tax. Level: Medium Topic: Calculating Earnings and Taxes
57. For which of the following taxes is there no limit on the amount of annual earnings subject to the tax? A. Federal unemployment compensation tax B. Social Security tax C. Federal income tax D. State unemployment compensation tax
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 10-01 Explain the major federal laws relating to employee earnings and withholding. Learning Objective: 10-02 Compute gross earnings of employees. Learning Objective: 10-03 Determine employee deductions for social security tax. Learning Objective: 10-04 Determine Employee Deductions For Medicare Tax. Level: Medium Topic: Calculating Earnings and Taxes Topic: Payroll Laws and Taxes
10-43 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
58. The Payroll Tax Expense account is used to record which of the following taxes? A. Federal unemployment compensation tax B. Federal Income Tax C. State Income Taxes D. Sales Taxes
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Easy Topic: Recording Payroll Information
59. Jill Monroe earns $25 per hour. She worked 48 hours this pay period and receives timeand-a-half for any hours worked over 40 hours per week. Jill's gross earnings are: A. $1,200 B. $1,300 C. $1,100 D. $1,920
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 10-02 Compute gross earnings of employees. Level: Easy Topic: Calculating Earnings and Taxes
60. Which of the following is NOT typically an employee payroll withholding? A. federal income taxes B. state unemployment taxes C. union dues D. medical insurance
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 10-01 Explain the major federal laws relating to employee earnings and withholding. Learning Objective: 10-02 Compute gross earnings of employees. Learning Objective: 10-03 Determine employee deductions for social security tax. Learning Objective: 10-04 Determine Employee Deductions For Medicare Tax. Level: Easy Topic: Calculating Earnings and Taxes Topic: Payroll Laws and Taxes
10-44 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
61. The employer records the amount of federal income tax withheld as: A. an asset. B. a payroll tax expense. C. a liability. D. an expense.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Easy Topic: Recording Payroll Information
62. FICA taxes are paid by: A. employees only. B. employer and federal government. C. both the employee and employer. D. neither the employee nor employer.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 10-03 Determine employee deductions for social security tax. Learning Objective: 10-04 Determine Employee Deductions For Medicare Tax. Level: Easy Topic: Calculating Earnings and Taxes
63. Rick O'Shea, the only employee of Hunter Furniture Company, makes $30,000 per year and is paid once a month. For the month of July, his federal income taxes withheld are $180, state income taxes withheld are $37, social security is 6.2%, Medicare tax is 1.45%, State Unemployment Tax is 4%, and Federal Unemployment tax is .8%. What is Rick's net pay for July? A. $2,500.00 B. $2,283.00 C. $2,308.75 D. $2,091.75
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 10-06 Enter gross earnings; deductions; and net pay in the payroll register. Level: Medium Topic: Calculating Earnings and Taxes
10-45 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
64. Rick O'Shea, the only employee of Hunter Furniture Company, makes $30,000 per year and is paid once a month. For the month of July, his federal income taxes withheld are $180, state income taxes withheld are $37, social security is 6.2%, Medicare tax is 1.45%, State Unemployment Tax is 4%, and Federal Unemployment tax is .8%. What is the total amount of employer payroll taxes for the month of July for Hunter Furniture Company? (Assume all earnings are subject to employer payroll taxes.) A. $311.25 B. $120.00 C. $191.25 D. $155.00
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 10-04 Determine Employee Deductions For Medicare Tax. Learning Objective: 10-05 Determine employee deductions for income tax. Learning Objective: 10-06 Enter gross earnings; deductions; and net pay in the payroll register. Level: Hard Topic: Calculating Earnings and Taxes
65. The total amount earned by the employee is called the A. gross pay B. take home pay C. net pay D. payroll
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 10-06 Enter gross earnings; deductions; and net pay in the payroll register. Level: Easy Topic: Calculating Earnings and Taxes
10-46 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
Short Answer Questions
66. During one week, three employees of the Snowshoe Lodge worked the number of hours shown below. All these employees receive overtime pay at one and a half times their regular hourly rate for any hours worked beyond 40 in a week. Compute the regular earnings, overtime earnings, and gross pay for each employee.
Employee No. 1: Reg. Earn., $480.00; OT Earnings., $108.00; Gross, $588.00 Employee No. 2: Reg. Earn., $360.00; OT Earnings., $54.00; Gross, $414.00 Employee No. 3: Reg. Earn., $340.00; OT Earnings., $63.75; Gross, $403.75
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-02 Compute gross earnings of employees. Level: Easy Topic: Calculating Earnings and Taxes
10-47 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
67. During one week, three employees of the Tea Leaf Cafe worked the number of hours shown below. All these employees receive overtime pay at one and a half times their regular hourly rate for any hours worked beyond 40 in a week. Compute the regular earnings, overtime earnings, and gross pay for each employee.
Employee No. 1: Reg. Earn., $520.00; OT Earnings., $117.00; Gross, $637.00 Employee No. 2: Reg. Earn., $440.00; OT Earnings., $66.00; Gross, $506.00 Employee No. 3: Reg. Earn., $360.00; OT Earnings., $67.50; Gross, $427.50
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-02 Compute gross earnings of employees. Level: Easy Topic: Calculating Earnings and Taxes
10-48 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
68. During one week, three employees of the Pampered Pooch Pet Salon worked the number of hours shown below. All these employees receive overtime pay at one and a half times their regular hourly rate for any hours worked beyond 40 in a week. Compute the regular earnings, overtime earnings, and gross pay for each employee.
Employee No. 1: Reg. Earn., $960.00; OT Earnings., $216.00; Gross, $1,176.00 Employee No. 2: Reg. Earn., $720.00; OT Earnings., $108.00; Gross, $828.00 Employee No. 3: Reg. Earn., $680.00; OT Earnings., $127.50; Gross, $807.50
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-02 Compute gross earnings of employees. Level: Medium Topic: Calculating Earnings and Taxes
10-49 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
69. During one week, three employees of the Siesta Inn worked the number of hours shown below. All these employees receive overtime pay at one and a half times their regular hourly rate for any hours worked beyond 40 in a week. Compute the regular earnings, overtime earnings, and gross pay for each employee.
Employee No. 1: Reg. Earn., $560.00; OT Earnings., $126.00; Gross, $686.00 Employee No. 2: Reg. Earn., $480.00; OT Earnings., $72.00; Gross, $552.00 Employee No. 3: Reg. Earn., $400.00; OT Earnings., $75.00; Gross, $475.00
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-02 Compute gross earnings of employees. Level: Medium Topic: Calculating Earnings and Taxes
10-50 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
70. The monthly salaries for December and the year-to-date earnings as of November 30 for the three employees of the Lakeview Medical Center are listed below. Compute the amount of social security tax and Medicare tax to be withheld from each of the employee's gross pay for December. Assume a 6.2 percent social security tax rate and a base of $106,800 for the calendar year. Assume a 1.45 percent Medicare tax rate.
Employee No. 1: Soc. Sec. Tax, $465.00; Medicare Tax, $108.75 Employee No. 2: Soc. Sec. Tax, zero; Medicare Tax, $130.05 Employee No. 3: Soc. Sec. Tax, $328.60; Medicare Tax, $123.25
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-03 Determine employee deductions for social security tax. Learning Objective: 10-04 Determine Employee Deductions For Medicare Tax. Level: Medium Topic: Calculating Earnings and Taxes
10-51 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
71. The monthly salaries for December and the year-to-date earnings as of November 30 for the three employees of the Design Warehouse are listed below. Compute the amount of social security tax and Medicare tax to be withheld from each of the employee's gross pay for December. Assume a 6.2 percent social security tax rate and a base of $106,800 for the calendar year. Assume a 1.45 percent Medicare tax rate.
Employee No. 1: Soc. Sec. Tax, $582.80; Medicare Tax, $136.30 Employee No. 2: Soc. Sec. Tax, zero; Medicare Tax, $145.00 Employee No. 3: Soc. Sec. Tax, $248.00; Medicare Tax, $137.75
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-03 Determine employee deductions for social security tax. Learning Objective: 10-04 Determine Employee Deductions For Medicare Tax. Level: Medium Topic: Calculating Earnings and Taxes
10-52 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
72. The monthly salaries for December and the year-to-date earnings as of November 30 for the three employees of the Barbara's Bookstore, Inc. are listed below. Compute the amount of social security tax and Medicare tax to be withheld from each of the employee's gross pay for December. Assume a 6.2 percent social security tax rate and a base of $106,800 for the calendar year. Assume a 1.45 percent Medicare tax rate.
Employee No. 1: Soc. Sec. Tax, $142.60; Medicare Tax, $114.55 Employee No. 2: Soc. Sec. Tax, $496.00; Medicare Tax, $116.00 Employee No. 3: Soc. Sec. Tax, zero; Medicare Tax, $143.55
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-03 Determine employee deductions for social security tax. Learning Objective: 10-04 Determine Employee Deductions For Medicare Tax. Level: Medium Topic: Calculating Earnings and Taxes
10-53 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
73. The monthly salaries for December and the year-to-date earnings as of November 30 for the three employees of Heather's Hair Salon are listed below. Compute the amount of social security tax and Medicare tax to be withheld from each of the employee's gross pay for December. Assume a 6.2 percent social security tax rate and a base of $106,800 for the calendar year. Assume a 1.45 percent Medicare tax rate.
Employee No. 1: Soc. Sec. Tax, $111.60; Medicare Tax, $130.50 Employee No. 2: Soc. Sec. Tax, zero; Medicare Tax, $133.40 Employee No. 3: Soc. Sec. Tax, $545.60; Medicare Tax, $127.60
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-03 Determine employee deductions for social security tax. Learning Objective: 10-04 Determine Employee Deductions For Medicare Tax. Level: Medium Topic: Calculating Earnings and Taxes
10-54 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
74. During the week ended May 15, 2013, Scott Fairchild worked 40 hours. His regular hourly rate is $14. Assume that his earnings are subject to social security tax at a rate of 6.2 percent and Medicare tax at a rate of 1.45 percent. He also has deductions of $31 for federal income tax and $21 for health insurance. A) What is his gross pay for the week? B) What is the total of his deductions for the week? C) What is his net pay for the week? A) $560.00 B) $94.84 ($34.72 + $8.12 + $31.00 + $21.00) C) $465.16
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-02 Compute gross earnings of employees. Learning Objective: 10-03 Determine employee deductions for social security tax. Learning Objective: 10-04 Determine Employee Deductions For Medicare Tax. Learning Objective: 10-06 Enter gross earnings; deductions; and net pay in the payroll register. Level: Medium Topic: Calculating Earnings and Taxes
75. During the week ended January 11, 2013, Darlene Marcussen worked 40 hours. Her regular hourly rate is $18. Assume that her earnings are subject to social security tax at a rate of 6.2 percent and Medicare tax at a rate of 1.45 percent. She also has deductions of $40 for federal income tax and $21 for health insurance. A) What is her gross pay for the week? B) What is the total of her deductions for the week? C) What is her net pay for the week? A) $720.00 B) $116.08 ($44.64 + $10.44 + $40.00 + $21.00) C) $603.92
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-02 Compute gross earnings of employees. Learning Objective: 10-03 Determine employee deductions for social security tax. Learning Objective: 10-04 Determine Employee Deductions For Medicare Tax. Learning Objective: 10-06 Enter gross earnings; deductions; and net pay in the payroll register. Level: Medium Topic: Calculating Earnings and Taxes
10-55 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
76. During the week ended February 8, 2013, Stuart Wayne worked 40 hours. His regular hourly rate is $10. Assume that his earnings are subject to social security tax at a rate of 6.2 percent and Medicare tax at a rate of 1.45 percent. He also has deductions of $31 for federal income tax and $21 for health insurance. A) What is his gross pay for the week? B) What is the total of his deductions for the week? C) What is his net pay for the week? A) $400.00 B) $82.60 ($24.80 + $5.80 + $31.00 + $21.00) C) $317.40
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-02 Compute gross earnings of employees. Learning Objective: 10-03 Determine employee deductions for social security tax. Learning Objective: 10-04 Determine Employee Deductions For Medicare Tax. Learning Objective: 10-06 Enter gross earnings; deductions; and net pay in the payroll register. Level: Medium Topic: Calculating Earnings and Taxes
77. During the week ended April 26, 2013, Andy Tyler worked 40 hours. His regular hourly rate is $15. Assume that his earnings are subject to social security tax at a rate of 6.2 percent and Medicare tax at a rate of 1.45 percent. He also has deductions of $31 for federal income tax and $21 for health insurance. A) What is his gross pay for the week? B) What is the total of his deductions for the week? C) What is his net pay for the week? A) $600.00 B) $97.90 ($37.20 + $8.70 + $31.00 + $21.00) C) $502.10
AACSB: Analytic AICPA BB: Resource Management Bloom's: Apply Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Medium Topic: Recording Payroll Information
10-56 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
78. The Rollins Company has office employees and shipping employees. A summary of their earnings and deductions for the week ended June 14, 2013, is shown below. On page 6 of a general journal, record the June 14 payroll and the entry to summarize the effect of the checks written to pay the payroll.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Evaluate Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Medium Topic: Recording Payroll Information
10-57 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
79. The Royal Company has office employees and sales employees. A summary of their earnings and deductions for the week ended April 26, 2013, is shown below. On page 18 of a general journal, record the April 26 payroll and the entry to summarize the effect of the checks written to pay the payroll.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Evaluate Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Medium Topic: Recording Payroll Information
10-58 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
80. The Burns Company has two office employees and two shipping employees. A summary of their earnings and deductions for the week ended August 23, 2013, is shown below. On page 10 of a general journal, record the August 23 payroll and the entry to summarize the effect of the checks written to pay the payroll.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Evaluate Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Medium Topic: Recording Payroll Information
10-59 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
81. The Santa Fe Company has office employees and shipping employees. A summary of their earnings and deductions for the week ended July 12, 2013, is shown below. On page 16 of a general journal, record the July 12 payroll and the entry to summarize the effect of the checks written to pay the payroll.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Evaluate Learning Objective: 10-07 Journalize payroll transactions in the general journal. Level: Medium Topic: Recording Payroll Information
10-60 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
Matching Questions
82. Match the accounting terms with the description by entering the proper number. 1. A record of payroll information for each Social Security (FICA) employee for the pay period Tax 4 2. A person who is hired by and works under the control and direction of the employer Commission basis 12 3. A form used to claim exemption (withholding) allowances Salary basis 7 4. A tax imposed by the Federal Insurance Contributions Act and collected on employee earnings to provide retirement and disability Individual earnings benefits record 17 5. A method of paying employees according to a stated rate per hour Social Security Act 10 6. Salaried employees who hold supervisory or managerial positions who are not subject to the maximum hour and overtime pay provisions of the Wage and Hour Law Tax-exempt wages 14 7. A method of paying employees according to an agreed-upon amount for each week or month Hourly rate basis 5 8. A tax levied on employees and employers to provide medical care for the employee and the employee's spouse after each has reached age 65 Exempt employees 6 9. Taxes levied by a state government against employers to benefit unemployed workers Compensation record 18 10. A federal act providing certain benefits for employees and their families; officially the Workers' compensation Federal Insurance Contributions Act insurance 15 11. Taxes levied by the federal government against employers to benefit unemployed workers Time and a half 13 12. A method of paying employees according to a percentage of net sales Employee 2 13. Rate of pay for an employee's work in excess of 40 hours a week Medicare tax 8 14. Earnings in excess of the base amount set by the Social Security Act Payroll register 1 15. Insurance that protects employees against losses from job-related injuries or illnesses, or Employee's withholding compensates their families if death occurs in the Allowance certificate (Form course of the employment W-4) 3 16. One who is paid by a company to carry out a specific task or job but is not under the direct supervision or control of the company Independent contractor 16 10-61 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 10 - Payroll Computations, Records, and Payment
17. An employee record that contains information needed to compute earnings and complete tax reports 18. Another name for individual earnings record 19. A method of paying employees according to the number of units produced 20. A simple method to determine the amount of federal income tax to be withheld using a table provided by the government
State unemployment taxes 9 Piece-rate basis 19 Federal unemployment taxes 11 Wage-bracket table method 20
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 10-01 Explain the major federal laws relating to employee earnings and withholding. Learning Objective: 10-02 Compute gross earnings of employees. Learning Objective: 10-03 Determine employee deductions for social security tax. Learning Objective: 10-04 Determine Employee Deductions For Medicare Tax. Learning Objective: 10-05 Determine employee deductions for income tax. Learning Objective: 10-06 Enter gross earnings; deductions; and net pay in the payroll register. Learning Objective: 10-07 Journalize payroll transactions in the general journal. Learning Objective: 10-08 Maintain An Earnings Record For Each Employee. Learning Objective: 10-09 Define the accounting terms new to this chapter. Level: Medium Topic: Calculating Earnings and Taxes Topic: Payroll Laws and Taxes Topic: Recording Payroll Information
10-62 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
Chapter 11 Payroll Taxes, Deposits, and Reports True / False Questions
1. The frequency of deposits of federal income taxes withheld and social security and Medicare taxes is determined by the amount owed. True False
2. For the purpose of internal control, only the person who prepares payroll checks should distribute them. True False
3. To achieve internal control over payroll operations, no changes in employee pay rates should be made without written authorization from management. True False
4. A business pays the social security tax at the same rate and on the same taxable wages as its employees. True False
5. The entry to record the social security and Medicare taxes levied on a business includes a debit to Payroll Taxes Expense. True False
6. The entry to record the employer's payroll taxes would include a debit to an expense account and a credit to one or more liability accounts. True False
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Chapter 11 - Payroll Taxes, Deposits, and Reports
7. Form 941, which is used to report employee earnings, the federal income taxes withheld, and the social security and Medicare taxes, must be filed each time a firm makes a required deposit of the taxes due. True False
8. At the end of each quarter, the individual earnings records are totaled. True False
9. The employer must issue each employee a Form W-2 by January 15 of the next year. True False
10. If an employee leaves the firm before the end of the year, the employee may ask for and receive Form W-2 within 30 days after the request or after the final wage payment. True False
11. The information for preparing Form W-2 is obtained from the employees' individual earnings records. True False
12. FUTA tax, like social security tax, is levied on both the employer and the employee and, therefore, is withheld from employee's pay. True False
13. Sending copies of Form W-2 to each employee marks the end of the payroll procedures for the year. True False
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Chapter 11 - Payroll Taxes, Deposits, and Reports
14. The unemployment compensation tax program is often called the unemployment insurance program. True False
15. Form 940, which is used to report the employer's federal unemployment tax, must be filed quarterly. True False
Fill in the Blank Questions
16. A business pays ____________________ and Medicare taxes at the same rate and on the same taxable wages as its employees. ________________________________________
17. The entry to record the deposit of federal income taxes withheld includes a ____________________ to the Employee Income Tax Payable account. ________________________________________
18. Form 941 must be filed ____________________ time(s) a year. ________________________________________
19. Form 941 is used to report federal income taxes withheld, social security taxes, and ____________________ taxes. ________________________________________
20. A firm must issue a Form ____________________ to each employee by January 31 of the year following the year during which the wages were earned. ________________________________________
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Chapter 11 - Payroll Taxes, Deposits, and Reports
21. Form ____________________ is often referred to as a withholding statement. ________________________________________
22. Form ____________________ is submitted with a copy of the Form W-2 for each employee to the Social Security Administration. ________________________________________
23. The entry to record a payroll tax on the employer would include a debit to a(n) ____________________ account. ________________________________________
24. Firms that provide steady employment may be granted a lower state unemployment tax rate under a(n) ____________________, or merit-rating, system. ________________________________________
25. State Unemployment Tax Payable is ____________________ when the tax is paid to the state. ________________________________________
26. Federal unemployment tax deposits are made on a ____________________ basis. ________________________________________
27. Form 940 is used to report ____________________ taxes. ________________________________________
28. Form 940 must be filed ____________________ time(s) a year. ________________________________________
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Chapter 11 - Payroll Taxes, Deposits, and Reports
29. The premium rate on workers' compensation insurance is determined by the ____________________ involved in the work performed. ________________________________________
30. If the actual premium computed at year-end is less than the amount paid at the start of the year, the Workers' Compensation ____________________ account is debited in the adjusting entry. ________________________________________
Multiple Choice Questions
31. Which of the following statements is correct? A. The accountant obtains information about wages subject to payroll taxes from the payroll register. B. Most commercial banks are authorized to accept the employee's tax deposits for federal income taxes withheld and the employer's and employees' shares of social security taxes. C. Payroll tax deposits can be made electronically or using a Federal Tax Deposit Coupon, Form 8109. D. All of the above statements are correct.
32. Employees' payments for federal income taxes withheld and social security and Medicare taxes are periodically A. sent directly to the Internal Revenue Service. B. deposited in a special-purpose bank account, controlled by the company, until year-end when the funds are sent to the U.S. Treasury Department. C. sent to the local office of the Internal Revenue Service. D. deposited in a government-authorized financial institution.
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Chapter 11 - Payroll Taxes, Deposits, and Reports
33. The frequency of deposits of federal income taxes withheld and social security and Medicare taxes is most dependent on A. the amount owed. B. the number of payroll periods a firm has. C. the profit reported by the firm. D. the number of employees on the payroll.
34. Both the employer and the employee are responsible for paying A. social security and Medicare taxes. B. FUTA taxes. C. social security, Medicare, and FUTA taxes. D. SUTA taxes.
35. Only the employer is responsible for paying A. social security and Medicare taxes. B. FUTA taxes. C. social security, Medicare, and FUTA taxes. D. federal income taxes.
36. To record a deposit of federal income taxes withheld and social security and Medicare taxes, the accountant would A. debit an expense account and credit one or more liability accounts. B. debit an asset account and credit an expense account. C. debit one or more liability accounts and credit an asset account. D. debit one or more expense accounts and credit one or more liability accounts.
37. On Form 941, the Employer's Quarterly Federal Tax Return, a firm calculates its liability for the quarter for A. federal income taxes withheld, social security and Medicare taxes, and FUTA taxes. B. federal income taxes withheld and social security and Medicare taxes. C. social security and Medicare taxes and FUTA taxes. D. federal and state income taxes withheld.
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Chapter 11 - Payroll Taxes, Deposits, and Reports
38. Form 941 is filed A. monthly. B. quarterly. C. annually. D. each payroll period.
39. Which of the following statements is correct? A. Form 941 is often referred to as a withholding statement. B. An employee must attach one copy of Form W-2 to his or her personal federal income tax return. C. The employer sends one copy of the Form W-2 for each employee to the Internal Revenue Service. D. None of the above statements is correct.
40. Which of the following forms is submitted with a copy of the Form W-2 for each employee to the Social Security Administration? A. Form W-3 B. Form W-4 C. Form 940 D. Form 941
41. Each employee of a firm will receive several copies of Form W-2, the Wage and Tax Statement, from the A. employer with each paycheck. B. employer once a year. C. federal government once a year. D. employer once a quarter.
42. A copy of the Form W-2 for each employee is submitted to the Social Security Administration along with A. Form 940. B. Form 941. C. Form 8109. D. Form W-3.
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Chapter 11 - Payroll Taxes, Deposits, and Reports
43. Which of the following statements is not correct? A. A few states levy an unemployment tax on the employee that must be withheld from the employee's pay. B. One of the purposes of the unemployment insurance program is to stabilize employment and reduce unemployment. C. The reduction of state unemployment taxes because of favorable experience ratings reduces the credit allowable against the federal unemployment tax. D. The unemployment insurance program is a federal program.
44. Which of the following taxes is not withheld from an employee's pay? A. Federal income tax B. Social security tax C. FUTA tax D. Medicare tax
45. All of the following taxes are withheld from an employee's pay except A. Federal income tax. B. SUTA tax. C. Medicare tax. D. Social security tax.
46. To record the deposit of FUTA tax, the accountant would A. debit Payroll Taxes Expense and credit Federal Unemployment Tax Payable. B. debit Payroll Taxes Expense and credit Cash. C. debit Federal Unemployment Tax Payable and credit Cash. D. debit Social Security Taxes Payable and credit Cash.
47. To record the payment of SUTA tax, the accountant would A. debit Payroll Taxes Expense and credit State Unemployment Tax Payable. B. debit Payroll Taxes Expense and credit Cash. C. debit Social Security Taxes Payable and credit Cash. D. debit State Unemployment Tax Payable and credit Cash.
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Chapter 11 - Payroll Taxes, Deposits, and Reports
48. Employers usually record unemployment taxes at the end of each A. payroll. B. month. C. quarter. D. year.
49. Most states require that the employer file the state return for unemployment taxes A. monthly. B. quarterly. C. annually. D. each payroll period.
50. Tax returns for the federal unemployment tax are due A. weekly. B. monthly. C. quarterly. D. annually.
51. This preprinted government form is used to report federal unemployment taxes. A. Form 940 B. Form 941 C. Form 8109 D. Form W-2
52. All of the following are internal control procedures that are recommended to protect payroll operations except A. assign new employees to work in payroll operations. B. keep payroll records in locked files. C. make voluntary deductions from employee earnings based only on a signed authorization from the employee. D. retain all Forms W-4.
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Chapter 11 - Payroll Taxes, Deposits, and Reports
53. Generally, the base earnings subject to state unemployment taxes is A. smaller than the base for social security. B. the same as the base for social security. C. larger than the base for social security. D. the amount of total earnings.
54. If at the end of the year the firm owes a balance for workers' compensation insurance, the adjusting entry includes a A. debit to Workers' Compensation Insurance Payable a credit to Workers' Compensation Insurance Expense. B. a debit to Workers' Compensation Refund Receivable and a credit to Workers' Compensation Insurance Expense. C. a debit to Workers' Compensation Insurance Expense and a credit to Workers' Compensation Insurance Payable D. a debit to Payroll Taxes Expense and a credit to cash.
55. Mr. Zee worked 48 hours during the week ended January 18, 2013. He is paid $10 per hour, and is paid time and a half for all hours over 40 in a week. He had $100 withheld from his pay for federal income taxes, and $20 withheld for health insurance. The combined social security and Medicare tax rate is 7.65%, and the federal and state unemployment tax rates are .8% and 3.8%, respectively. All earnings are taxable. What is the total employer payroll tax expense for Mr. Zee's current paycheck? A. $63.70 B. $39.78 C. $23.92 D. $0
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Chapter 11 - Payroll Taxes, Deposits, and Reports
56. Alfred Spindle earned gross wages of $1,620 for the week ended June 21, 2013. His gross wages year to date, prior to his June 21 paycheck, are $38,556. He had $88 withheld from his pay for federal income taxes, and $16 for health insurance. Social Security and is 6.2% and Medicare tax is 1.45%; the federal unemployment tax rate is .8% and the state unemployment tax rate is 4.2%, both on a maximum of $7,000 per each employee's annual earnings. What is the total employer payroll tax expense from Alfred's June 21, 2013, paycheck? A. $204.93 B. $123.93 C. $81.00 D. $0
57. Rick O'Shea, the only employee of Hunter Furniture Company, makes $30,000 per year and is paid once a month. For the month of January, his federal income taxes withheld are $180, state income taxes withheld are $37, social security is 6.2% on a maximum wages of $106,800, Medicare tax is 1.45%, State Unemployment Tax is 4.2%, and Federal Unemployment tax is .8%, both on a maximum wages of $7,000 per employee. What is the employer's payroll tax expense from Rick's paycheck? A. $125.00 B. $191.25 C. $316.25 D. $155.00
58. Samantha Rodriguez had gross earnings for the pay period ending 10/15/13 of $4,785. Her total gross earnings as of 9/30/13 were $104,500. Social Security taxes are 6.2% on a maximum earnings of $106,800 per year. The Social Security tax due by her employer from her 10/15/13 paychecks is: A. $297.67 B. $142.60 C. $154.07 D. $192.75
59. Which of the following is not an employer payroll tax? A. federal unemployment tax B. federal income tax C. state unemployment tax D. FICA (Social Security and Medicare)
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Chapter 11 - Payroll Taxes, Deposits, and Reports
60. Roy DeSoto earns a regular hourly salary of $24.50. He is paid time-and-a-half for all hours in excess of 40 in the week. For the week ended March 8, 2013, he worked a total of 50 hours. His gross wages year to date, prior to his March 8, paycheck, are $11,980. Social Security Tax is 6.2%, Medicare Tax is 1.45%, federal unemployment tax is .8% and state unemployment tax is 4.2%, both on a maximum of $7,000 of gross wages per year. What is the employer's payroll tax expense for Roy for the week ended March 8, 2013? A. $154.96 B. $123.97 C. $170.47 D. $103.08
61. Kristy Casey earns $39,000 per year and is paid once a month. For January, she had $188 withheld from her pay for federal income taxes, and $52 withheld for health insurance. Social Security and is 6.2% and Medicare tax is 1.45%; the federal unemployment tax rate is .8% and state unemployment tax rates is 4.2%. What is the total employer payroll tax expense for Kristy's January paycheck? A. $385.13 B. $162.50 C. $248.63 D. $411.13
62. Which of the following payroll taxes is not paid by the employee? A. federal unemployment tax B. federal income tax C. state income tax D. FICA (Social Security and Medicare)
63. For which of the following is there no limit to the amount of wages subject to the tax? A. federal unemployment tax B. Medicare tax C. state unemployment tax D. Social Security tax
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Chapter 11 - Payroll Taxes, Deposits, and Reports
Short Answer Questions
64. After the JPR Corporation paid its employees on May 15, 2013, and recorded the corporation's share of payroll taxes for the payroll paid that date, the firm's general ledger showed a balance of $1,730 in the Social Security Tax Payable account, a balance of $356 in the Medicare Tax Payable account, and a balance of $1,972 in the Employee Income Tax Payable account. On May 16, 2013, the business issued a check to deposit the taxes owed in the local bank. Record this transaction on page 7 of a general journal.
65. After the ABC Corporation paid its employees on June 15, 2013, and recorded the corporation's share of payroll taxes for the payroll paid that date, the firm's general ledger showed a balance of $1,620 in the Social Security Tax Payable account, a balance of $401 in the Medicare Tax Payable account, and a balance of $1,851 in the Employee Income Tax Payable account. On June 16, 2013, the business issued a check to deposit the taxes owed in the local bank. Record this transaction on page 15 of a general journal.
66. After the Mansley Company paid its employees on July 15, 2013, and recorded the corporation's share of payroll taxes for the payroll paid that date, the firm's general ledger showed a balance of $1,695 in the Social Security Tax Payable account, a balance of $321 in the Medicare Tax Payable account, and a balance of $1,968 in the Employee Income Tax Payable account. On July 16, 2013, the business issued a check to deposit the taxes owed in the local bank. Record this transaction on page 23 of a general journal.
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Chapter 11 - Payroll Taxes, Deposits, and Reports
67. After the Marion Corporation paid its employees on November 15, 2013, and recorded the corporation's share of payroll taxes for the payroll paid that date, the firm's general ledger showed a balance of $1,925 in the Social Security Tax Payable account, a balance of $519 in the Medicare Tax Payable account, and a balance of $2,105 in the Employee Income Tax Payable account. On November 16, 2013, the business issued a check to deposit the taxes owed in the local bank. Record this transaction on page 5 of a general journal.
68. The payroll register of the Fox Manufacturing Company showed total employee earnings of $28,000 for the week ended April 19, 2013. Compute the employer's payroll taxes for the period. Use a rate of 6.2 percent for the employer's share of the social security tax, 1.45 percent for Medicare tax, 0.8 percent for FUTA tax, and 5.4 percent for SUTA tax. All earnings are taxable.
69. The payroll register of the Hound Manufacturing Company showed total employee earnings of $36,000 for the week ended September 20, 2013. Compute the employer's payroll taxes for the period. Use a rate of 6.2 percent for the employer's share of the social security tax, 1.45 percent for Medicare tax, 0.8 percent for FUTA tax, and 5.4 percent for SUTA tax. All earnings are taxable.
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Chapter 11 - Payroll Taxes, Deposits, and Reports
70. The payroll register of the Retro Manufacturing Company showed total employee earnings of $25,000 for the week ended January 18, 2013. Compute the employer's payroll taxes for the period. Use a rate of 6.2 percent for the employer's share of the social security tax, 1.45 percent for Medicare tax, 0.8 percent for FUTA tax, and 5.4 percent for SUTA tax. All earnings are taxable.
71. The payroll register of Rapid Repairs showed total employee earnings of $1,870 for the week ended April 5, 2013. Compute the employer's payroll taxes for the period. The tax rates are: Social security tax, 6.2 percent; Medicare tax, 1.45 percent; FUTA tax, 0.8 percent; SUTA tax, 2.2 percent. All earnings are taxable. Record the employer's payroll taxes for the period on page 4 of a general journal.
72. The payroll register of Reynolds Company showed total employee earnings of $2,320 for the week ended May 10, 2013. Compute the employer's payroll taxes for the period. The tax rates are: Social security tax, 6.2 percent; Medicare tax, 1.45 percent; FUTA tax, 0.8 percent; SUTA tax, 2.2 percent. All earnings are taxable. Record the employer's payroll taxes for the period on page 4 of a general journal.
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Chapter 11 - Payroll Taxes, Deposits, and Reports
73. The payroll register of Burdick Travel Agency showed total employee earnings of $1,450 for the week ended June 7, 2013. Compute the employer's payroll taxes for the period. The tax rates are: Social security tax, 6.2 percent; Medicare tax, 1.45 percent; FUTA tax, 0.8 percent; SUTA tax, 2.2 percent. All earnings are taxable. Record the employer's payroll taxes for the period on page 4 of a general journal.
74. The payroll register of Vtech Enterprises showed total employee earnings of $2,100 for the week ended August 2, 2013. Compute the employer's payroll taxes for the period. The tax rates are: Social security tax, 6.2 percent; Medicare tax, 1.45 percent; FUTA tax, 0.8 percent; SUTA tax, 2.2 percent. All earnings are taxable. Record the employer's payroll taxes for the period on page 4 of a general journal.
75. Wharfside Manufacturing estimates that its office employees will earn $50,000 next year and its factory employees will earn $260,000. The firm pays the following rates for workers' compensation insurance: $0.37 per $100 of wages for the office employees and $4.00 per $100 of wages for the factory employees. Compute the estimated premiums for the office and factory employees.
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Chapter 11 - Payroll Taxes, Deposits, and Reports
76. Beachside Manufacturing estimates that its office employees will earn $54,000 next year and its factory employees will earn $280,000. The firm pays the following rates for workers' compensation insurance: $0.40 per $100 of wages for the office employees and $4.10 per $100 of wages for the factory employees. Compute the estimated premiums for the office and factory employees.
77. Orleans Manufacturing estimates that its office employees will earn $75,000 next year and its factory employees will earn $200,000. The firm pays the following rates for workers' compensation insurance: $0.55 per $100 of wages for the office employees and $4.75 per $100 of wages for the factory employees. Compute the estimated premiums for the office and factory employees.
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Chapter 11 - Payroll Taxes, Deposits, and Reports
78. Compute and record workers' compensation insurance premiums for Fairlawn Manufacturing as follows: 1. The firm estimates that its office employees will earn $46,000 next year and its factory employees will earn $162,000. The firm pays the following rates for workers' compensation insurance: $0.40 per $100 of wages for the office employees and $3.50 per $100 of wages for the factory employees. Compute the estimated premiums for 2013. On page 9 of a general journal, record the payment of the estimated premium. Date the entry January 12, 2013. 2. On January 3, 2014, an audit of the firm's payroll records for 2013 showed that the firm had actually paid wages of $48,000 to its office employees and $165,000 to its factory employees. Compute the actual premium for the year and the balance due the insurance company or the credit due the firm. In the general journal, record the entry to adjust the Workers' Compensation Insurance Expense as of the end of 2013. Date the entry December 31, 2013.
79. Compute and record workers' compensation insurance premiums for Evergreen Manufacturing as follows: 1. The firm estimates that its office employees will earn $49,000 next year and its factory employees will earn $150,000. The firm pays the following rates for workers' compensation insurance: $0.40 per $100 of wages for the office employees and $3.50 per $100 of wages for the factory employees. Compute the estimated premiums for 2013. On page 54 of a general journal, record the payment of the estimated premium. Date the entry January 12, 2013. 2. On January 4, 2014, an audit of the firm's payroll records for 2013 showed that the firm had actually paid wages of $53,000 to its office employees and $161,000 to its factory employees. Compute the actual premium for the year and the balance due the insurance company or the credit due the firm. In the general journal, record the entry to adjust the Workers' Compensation Insurance Expense as of the end of 2013. Date the entry December 31, 2013.
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Chapter 11 - Payroll Taxes, Deposits, and Reports
80. Compute and record workers' compensation insurance premiums for Beverly Manufacturing as follows: 1. The firm estimates that its office employees will earn $40,000 next year and its factory employees will earn $172,000. The firm pays the following rates for workers' compensation insurance: $0.40 per $100 of wages for the office employees and $3.50 per $100 of wages for the factory employees. Compute the estimated premiums for 2013. On page 9 of a general journal, record the payment of the estimated premium. Date the entry January 12, 2013. 2. On January 3, 2014, an audit of the firm's payroll records for 2013 showed that the firm had actually paid wages of $48,000 to its office employees and $165,000 to its factory employees. Compute the actual premium for the year and the balance due the insurance company or the credit due the firm. In the general journal, record the entry to adjust the Workers' Compensation Insurance Expense as of the end of 2013. Date the entry December 31, 2013.
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Chapter 11 - Payroll Taxes, Deposits, and Reports
81. A firm prepares copies of the Wage and Tax Statement, Form W-2, for which of the following? Check all that apply. ___1. One copy for the employee's records. ___2. One copy for the employer's records. ___3. One copy for the supervisor's records. ___4. One copy for city or county income tax. ___5. One copy for the employee to attach to the state income tax return. ___6. One copy for the employee to attach to the federal income tax return. ___7. One copy for the employer to send to the Social Security Administration ___8. One copy for the employee to send to the Social Security Administration
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Chapter 11 - Payroll Taxes, Deposits, and Reports
Matching Questions
82. Match the accounting terms with the description by entering the proper number. 1. Preprinted government form used by the employer to report payroll tax information relating to social security, Medicare, and employee income tax withholding to the Transmittal of Wage and Internal Revenue Service Tax Statements, Form W-3 ____ 2. Preprinted government form used by the employer to report unemployment taxes for the Experience rating calendar year system ____ 3. A system that rewards an employer for maintaining steady employment conditions by reducing the firm's state unemployment tax Wage and Tax rate Statement, Form W-2 ____ 4. Another term for Wage and Tax Statement, Unemployment Form W-2 insurance program ____ 5. Preprinted government form submitted with Employer's Quarterly Forms W-2 to the Social Security Federal Tax Return, Form Administration 941 ____ Employer's Annual Federal Unemployment Tax 6. Another term for Experience rating system Return, Form 940 ____ 7. Preprinted government form that contains information about an employee's earnings and tax withholdings for the year Withholding statement ____ 8. A program that provides unemployment compensation through a tax levied on employers Merit rating system ____
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Chapter 11 - Payroll Taxes, Deposits, and Reports
Chapter 11 Payroll Taxes, Deposits, and Reports Answer Key
True / False Questions
1. The frequency of deposits of federal income taxes withheld and social security and Medicare taxes is determined by the amount owed. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-01 Explain how and when payroll taxes are paid to the government. Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
2. For the purpose of internal control, only the person who prepares payroll checks should distribute them. FALSE
AACSB: Analytic AICPA BB: Resource Management Bloom's: Understand Learning Objective: 11-08 Compute and record workers' compensation insurance premiums. Level: Medium Topic: Unemployment Tax and Workers' Compensation
3. To achieve internal control over payroll operations, no changes in employee pay rates should be made without written authorization from management. TRUE
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 11-08 Compute and record workers' compensation insurance premiums. Level: Easy Topic: Unemployment Tax and Workers' Compensation
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Chapter 11 - Payroll Taxes, Deposits, and Reports
4. A business pays the social security tax at the same rate and on the same taxable wages as its employees. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
5. The entry to record the social security and Medicare taxes levied on a business includes a debit to Payroll Taxes Expense. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax
6. The entry to record the employer's payroll taxes would include a debit to an expense account and a credit to one or more liability accounts. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
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Chapter 11 - Payroll Taxes, Deposits, and Reports
7. Form 941, which is used to report employee earnings, the federal income taxes withheld, and the social security and Medicare taxes, must be filed each time a firm makes a required deposit of the taxes due. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-04 Prepare an Employer's Quarterly Federal Tax Return; Form 941. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax
8. At the end of each quarter, the individual earnings records are totaled. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 11-04 Prepare an Employer's Quarterly Federal Tax Return; Form 941. Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
9. The employer must issue each employee a Form W-2 by January 15 of the next year. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-05 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Level: Medium Topic: Social Security, Medicare, and Employee Income Tax
10. If an employee leaves the firm before the end of the year, the employee may ask for and receive Form W-2 within 30 days after the request or after the final wage payment. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-05 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Level: Medium Topic: Social Security, Medicare, and Employee Income Tax
11-24 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
11. The information for preparing Form W-2 is obtained from the employees' individual earnings records. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-05 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
12. FUTA tax, like social security tax, is levied on both the employer and the employee and, therefore, is withheld from employee's pay. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Easy Topic: Unemployment Tax and Workers' Compensation
13. Sending copies of Form W-2 to each employee marks the end of the payroll procedures for the year. FALSE
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 11-05 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Level: Medium Topic: Social Security, Medicare, and Employee Income Tax
14. The unemployment compensation tax program is often called the unemployment insurance program. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Easy Topic: Unemployment Tax and Workers' Compensation
11-25 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
15. Form 940, which is used to report the employer's federal unemployment tax, must be filed quarterly. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-07 Prepare an Employer's Federal Unemployment Tax Return; Form 940. Level: Medium Topic: Unemployment Tax and Workers' Compensation
Fill in the Blank Questions
16. A business pays ____________________ and Medicare taxes at the same rate and on the same taxable wages as its employees. social security
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
17. The entry to record the deposit of federal income taxes withheld includes a ____________________ to the Employee Income Tax Payable account. debit
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 11-03 Record deposit of social security; Medicare; and employee income taxes. Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
11-26 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
18. Form 941 must be filed ____________________ time(s) a year. four
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-04 Prepare an Employer's Quarterly Federal Tax Return; Form 941. Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
19. Form 941 is used to report federal income taxes withheld, social security taxes, and ____________________ taxes. Medicare
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-04 Prepare an Employer's Quarterly Federal Tax Return; Form 941. Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
20. A firm must issue a Form ____________________ to each employee by January 31 of the year following the year during which the wages were earned. W-2
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-05 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
21. Form ____________________ is often referred to as a withholding statement. W-2
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 11-05 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
11-27 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
22. Form ____________________ is submitted with a copy of the Form W-2 for each employee to the Social Security Administration. W-3
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-05 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
23. The entry to record a payroll tax on the employer would include a debit to a(n) ____________________ account. expense
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Easy Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
24. Firms that provide steady employment may be granted a lower state unemployment tax rate under a(n) ____________________, or merit-rating, system. experience-rating
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Easy Topic: Unemployment Tax and Workers' Compensation
11-28 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
25. State Unemployment Tax Payable is ____________________ when the tax is paid to the state. debited
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Easy Topic: Unemployment Tax and Workers' Compensation
26. Federal unemployment tax deposits are made on a ____________________ basis. quarterly
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Easy Topic: Unemployment Tax and Workers' Compensation
27. Form 940 is used to report ____________________ taxes. FUTA
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-07 Prepare an Employer's Federal Unemployment Tax Return; Form 940. Level: Easy Topic: Unemployment Tax and Workers' Compensation
28. Form 940 must be filed ____________________ time(s) a year. one
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-07 Prepare an Employer's Federal Unemployment Tax Return; Form 940. Level: Easy Topic: Unemployment Tax and Workers' Compensation
11-29 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
29. The premium rate on workers' compensation insurance is determined by the ____________________ involved in the work performed. risk
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 11-08 Compute and record workers' compensation insurance premiums. Level: Easy Topic: Unemployment Tax and Workers' Compensation
30. If the actual premium computed at year-end is less than the amount paid at the start of the year, the Workers' Compensation ____________________ account is debited in the adjusting entry. Refund Receivable
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 11-08 Compute and record workers' compensation insurance premiums. Level: Easy Topic: Unemployment Tax and Workers' Compensation
Multiple Choice Questions
31. Which of the following statements is correct? A. The accountant obtains information about wages subject to payroll taxes from the payroll register. B. Most commercial banks are authorized to accept the employee's tax deposits for federal income taxes withheld and the employer's and employees' shares of social security taxes. C. Payroll tax deposits can be made electronically or using a Federal Tax Deposit Coupon, Form 8109. D. All of the above statements are correct.
AACSB: Reflective Thinking AICPA FN: Critical Thinking Bloom's: Remember Learning Objective: 11-01 Explain how and when payroll taxes are paid to the government. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax
11-30 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
32. Employees' payments for federal income taxes withheld and social security and Medicare taxes are periodically A. sent directly to the Internal Revenue Service. B. deposited in a special-purpose bank account, controlled by the company, until year-end when the funds are sent to the U.S. Treasury Department. C. sent to the local office of the Internal Revenue Service. D. deposited in a government-authorized financial institution.
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 11-01 Explain how and when payroll taxes are paid to the government. Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
33. The frequency of deposits of federal income taxes withheld and social security and Medicare taxes is most dependent on A. the amount owed. B. the number of payroll periods a firm has. C. the profit reported by the firm. D. the number of employees on the payroll.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-01 Explain how and when payroll taxes are paid to the government. Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
34. Both the employer and the employee are responsible for paying A. social security and Medicare taxes. B. FUTA taxes. C. social security, Medicare, and FUTA taxes. D. SUTA taxes.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
11-31 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
35. Only the employer is responsible for paying A. social security and Medicare taxes. B. FUTA taxes. C. social security, Medicare, and FUTA taxes. D. federal income taxes.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
36. To record a deposit of federal income taxes withheld and social security and Medicare taxes, the accountant would A. debit an expense account and credit one or more liability accounts. B. debit an asset account and credit an expense account. C. debit one or more liability accounts and credit an asset account. D. debit one or more expense accounts and credit one or more liability accounts.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 11-03 Record deposit of social security; Medicare; and employee income taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax
37. On Form 941, the Employer's Quarterly Federal Tax Return, a firm calculates its liability for the quarter for A. federal income taxes withheld, social security and Medicare taxes, and FUTA taxes. B. federal income taxes withheld and social security and Medicare taxes. C. social security and Medicare taxes and FUTA taxes. D. federal and state income taxes withheld.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-04 Prepare an Employer's Quarterly Federal Tax Return; Form 941. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax
11-32 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
38. Form 941 is filed A. monthly. B. quarterly. C. annually. D. each payroll period.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-04 Prepare an Employer's Quarterly Federal Tax Return; Form 941. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax
39. Which of the following statements is correct? A. Form 941 is often referred to as a withholding statement. B. An employee must attach one copy of Form W-2 to his or her personal federal income tax return. C. The employer sends one copy of the Form W-2 for each employee to the Internal Revenue Service. D. None of the above statements is correct.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Understand Learning Objective: 11-05 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Level: Medium Topic: Social Security, Medicare, and Employee Income Tax
40. Which of the following forms is submitted with a copy of the Form W-2 for each employee to the Social Security Administration? A. Form W-3 B. Form W-4 C. Form 940 D. Form 941
AACSB: Analytic AICPA BB: Resource Management Bloom's: Understand Learning Objective: 11-05 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
11-33 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
41. Each employee of a firm will receive several copies of Form W-2, the Wage and Tax Statement, from the A. employer with each paycheck. B. employer once a year. C. federal government once a year. D. employer once a quarter.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 11-05 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Level: Easy Topic: Social Security, Medicare, and Employee Income Tax
42. A copy of the Form W-2 for each employee is submitted to the Social Security Administration along with A. Form 940. B. Form 941. C. Form 8109. D. Form W-3.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 11-05 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Level: Medium Topic: Social Security, Medicare, and Employee Income Tax
43. Which of the following statements is not correct? A. A few states levy an unemployment tax on the employee that must be withheld from the employee's pay. B. One of the purposes of the unemployment insurance program is to stabilize employment and reduce unemployment. C. The reduction of state unemployment taxes because of favorable experience ratings reduces the credit allowable against the federal unemployment tax. D. The unemployment insurance program is a federal program.
AACSB: Reflective Thinking AICPA FN: Critical Thinking Bloom's: Understand Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Medium Topic: Unemployment Tax and Workers' Compensation
11-34 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
44. Which of the following taxes is not withheld from an employee's pay? A. Federal income tax B. Social security tax C. FUTA tax D. Medicare tax
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Easy Topic: Unemployment Tax and Workers' Compensation
45. All of the following taxes are withheld from an employee's pay except A. Federal income tax. B. SUTA tax. C. Medicare tax. D. Social security tax.
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Easy Topic: Unemployment Tax and Workers' Compensation
46. To record the deposit of FUTA tax, the accountant would A. debit Payroll Taxes Expense and credit Federal Unemployment Tax Payable. B. debit Payroll Taxes Expense and credit Cash. C. debit Federal Unemployment Tax Payable and credit Cash. D. debit Social Security Taxes Payable and credit Cash.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Easy Topic: Unemployment Tax and Workers' Compensation
11-35 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
47. To record the payment of SUTA tax, the accountant would A. debit Payroll Taxes Expense and credit State Unemployment Tax Payable. B. debit Payroll Taxes Expense and credit Cash. C. debit Social Security Taxes Payable and credit Cash. D. debit State Unemployment Tax Payable and credit Cash.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Easy Topic: Unemployment Tax and Workers' Compensation
48. Employers usually record unemployment taxes at the end of each A. payroll. B. month. C. quarter. D. year.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Easy Topic: Unemployment Tax and Workers' Compensation
49. Most states require that the employer file the state return for unemployment taxes A. monthly. B. quarterly. C. annually. D. each payroll period.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Easy Topic: Unemployment Tax and Workers' Compensation
11-36 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
50. Tax returns for the federal unemployment tax are due A. weekly. B. monthly. C. quarterly. D. annually.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-07 Prepare an Employer's Federal Unemployment Tax Return; Form 940. Level: Easy Topic: Unemployment Tax and Workers' Compensation
51. This preprinted government form is used to report federal unemployment taxes. A. Form 940 B. Form 941 C. Form 8109 D. Form W-2
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 11-07 Prepare an Employer's Federal Unemployment Tax Return; Form 940. Level: Easy Topic: Unemployment Tax and Workers' Compensation
52. All of the following are internal control procedures that are recommended to protect payroll operations except A. assign new employees to work in payroll operations. B. keep payroll records in locked files. C. make voluntary deductions from employee earnings based only on a signed authorization from the employee. D. retain all Forms W-4.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Understand Learning Objective: 11-08 Compute and record workers' compensation insurance premiums. Level: Easy Topic: Unemployment Tax and Workers' Compensation
11-37 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
53. Generally, the base earnings subject to state unemployment taxes is A. smaller than the base for social security. B. the same as the base for social security. C. larger than the base for social security. D. the amount of total earnings.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Understand Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Easy Topic: Unemployment Tax and Workers' Compensation
54. If at the end of the year the firm owes a balance for workers' compensation insurance, the adjusting entry includes a A. debit to Workers' Compensation Insurance Payable a credit to Workers' Compensation Insurance Expense. B. a debit to Workers' Compensation Refund Receivable and a credit to Workers' Compensation Insurance Expense. C. a debit to Workers' Compensation Insurance Expense and a credit to Workers' Compensation Insurance Payable D. a debit to Payroll Taxes Expense and a credit to cash.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 11-08 Compute and record workers' compensation insurance premiums. Level: Medium Topic: Unemployment Tax and Workers' Compensation
11-38 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
55. Mr. Zee worked 48 hours during the week ended January 18, 2013. He is paid $10 per hour, and is paid time and a half for all hours over 40 in a week. He had $100 withheld from his pay for federal income taxes, and $20 withheld for health insurance. The combined social security and Medicare tax rate is 7.65%, and the federal and state unemployment tax rates are .8% and 3.8%, respectively. All earnings are taxable. What is the total employer payroll tax expense for Mr. Zee's current paycheck? A. $63.70 B. $39.78 C. $23.92 D. $0
AACSB: Analytic AICPA FN: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
56. Alfred Spindle earned gross wages of $1,620 for the week ended June 21, 2013. His gross wages year to date, prior to his June 21 paycheck, are $38,556. He had $88 withheld from his pay for federal income taxes, and $16 for health insurance. Social Security and is 6.2% and Medicare tax is 1.45%; the federal unemployment tax rate is .8% and the state unemployment tax rate is 4.2%, both on a maximum of $7,000 per each employee's annual earnings. What is the total employer payroll tax expense from Alfred's June 21, 2013, paycheck? A. $204.93 B. $123.93 C. $81.00 D. $0
AACSB: Analytic AICPA FN: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Hard Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
11-39 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
57. Rick O'Shea, the only employee of Hunter Furniture Company, makes $30,000 per year and is paid once a month. For the month of January, his federal income taxes withheld are $180, state income taxes withheld are $37, social security is 6.2% on a maximum wages of $106,800, Medicare tax is 1.45%, State Unemployment Tax is 4.2%, and Federal Unemployment tax is .8%, both on a maximum wages of $7,000 per employee. What is the employer's payroll tax expense from Rick's paycheck? A. $125.00 B. $191.25 C. $316.25 D. $155.00
AACSB: Analytic AICPA FN: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
58. Samantha Rodriguez had gross earnings for the pay period ending 10/15/13 of $4,785. Her total gross earnings as of 9/30/13 were $104,500. Social Security taxes are 6.2% on a maximum earnings of $106,800 per year. The Social Security tax due by her employer from her 10/15/13 paychecks is: A. $297.67 B. $142.60 C. $154.07 D. $192.75
AACSB: Analytic AICPA FN: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
11-40 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
59. Which of the following is not an employer payroll tax? A. federal unemployment tax B. federal income tax C. state unemployment tax D. FICA (Social Security and Medicare)
AACSB: Analytic AICPA FN: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
60. Roy DeSoto earns a regular hourly salary of $24.50. He is paid time-and-a-half for all hours in excess of 40 in the week. For the week ended March 8, 2013, he worked a total of 50 hours. His gross wages year to date, prior to his March 8, paycheck, are $11,980. Social Security Tax is 6.2%, Medicare Tax is 1.45%, federal unemployment tax is .8% and state unemployment tax is 4.2%, both on a maximum of $7,000 of gross wages per year. What is the employer's payroll tax expense for Roy for the week ended March 8, 2013? A. $154.96 B. $123.97 C. $170.47 D. $103.08
AACSB: Analytic AICPA FN: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Hard Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
11-41 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
61. Kristy Casey earns $39,000 per year and is paid once a month. For January, she had $188 withheld from her pay for federal income taxes, and $52 withheld for health insurance. Social Security and is 6.2% and Medicare tax is 1.45%; the federal unemployment tax rate is .8% and state unemployment tax rates is 4.2%. What is the total employer payroll tax expense for Kristy's January paycheck? A. $385.13 B. $162.50 C. $248.63 D. $411.13
AACSB: Analytic AICPA FN: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
62. Which of the following payroll taxes is not paid by the employee? A. federal unemployment tax B. federal income tax C. state income tax D. FICA (Social Security and Medicare)
AACSB: Analytic AICPA FN: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
11-42 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
63. For which of the following is there no limit to the amount of wages subject to the tax? A. federal unemployment tax B. Medicare tax C. state unemployment tax D. Social Security tax
AACSB: Analytic AICPA FN: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
Short Answer Questions
64. After the JPR Corporation paid its employees on May 15, 2013, and recorded the corporation's share of payroll taxes for the payroll paid that date, the firm's general ledger showed a balance of $1,730 in the Social Security Tax Payable account, a balance of $356 in the Medicare Tax Payable account, and a balance of $1,972 in the Employee Income Tax Payable account. On May 16, 2013, the business issued a check to deposit the taxes owed in the local bank. Record this transaction on page 7 of a general journal.
AACSB: Analytic AICPA FN: Critical Thinking Bloom's: Apply Learning Objective: 11-03 Record deposit of social security; Medicare; and employee income taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax
11-43 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
65. After the ABC Corporation paid its employees on June 15, 2013, and recorded the corporation's share of payroll taxes for the payroll paid that date, the firm's general ledger showed a balance of $1,620 in the Social Security Tax Payable account, a balance of $401 in the Medicare Tax Payable account, and a balance of $1,851 in the Employee Income Tax Payable account. On June 16, 2013, the business issued a check to deposit the taxes owed in the local bank. Record this transaction on page 15 of a general journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 11-03 Record deposit of social security; Medicare; and employee income taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax
11-44 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
66. After the Mansley Company paid its employees on July 15, 2013, and recorded the corporation's share of payroll taxes for the payroll paid that date, the firm's general ledger showed a balance of $1,695 in the Social Security Tax Payable account, a balance of $321 in the Medicare Tax Payable account, and a balance of $1,968 in the Employee Income Tax Payable account. On July 16, 2013, the business issued a check to deposit the taxes owed in the local bank. Record this transaction on page 23 of a general journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 11-03 Record deposit of social security; Medicare; and employee income taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax
11-45 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
67. After the Marion Corporation paid its employees on November 15, 2013, and recorded the corporation's share of payroll taxes for the payroll paid that date, the firm's general ledger showed a balance of $1,925 in the Social Security Tax Payable account, a balance of $519 in the Medicare Tax Payable account, and a balance of $2,105 in the Employee Income Tax Payable account. On November 16, 2013, the business issued a check to deposit the taxes owed in the local bank. Record this transaction on page 5 of a general journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 11-03 Record deposit of social security; Medicare; and employee income taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax
68. The payroll register of the Fox Manufacturing Company showed total employee earnings of $28,000 for the week ended April 19, 2013. Compute the employer's payroll taxes for the period. Use a rate of 6.2 percent for the employer's share of the social security tax, 1.45 percent for Medicare tax, 0.8 percent for FUTA tax, and 5.4 percent for SUTA tax. All earnings are taxable. Social security tax, $1,736; Medicare tax, $406; FUTA tax, $224; SUTA, $1,512
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
11-46 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
69. The payroll register of the Hound Manufacturing Company showed total employee earnings of $36,000 for the week ended September 20, 2013. Compute the employer's payroll taxes for the period. Use a rate of 6.2 percent for the employer's share of the social security tax, 1.45 percent for Medicare tax, 0.8 percent for FUTA tax, and 5.4 percent for SUTA tax. All earnings are taxable. Social security tax, $2,232; Medicare tax, $522; FUTA tax, $288; SUTA, $1,944
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
70. The payroll register of the Retro Manufacturing Company showed total employee earnings of $25,000 for the week ended January 18, 2013. Compute the employer's payroll taxes for the period. Use a rate of 6.2 percent for the employer's share of the social security tax, 1.45 percent for Medicare tax, 0.8 percent for FUTA tax, and 5.4 percent for SUTA tax. All earnings are taxable. Social security tax, $1,550; Medicare tax, $362.50; FUTA tax, $200; SUTA, $1,350
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
11-47 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
71. The payroll register of Rapid Repairs showed total employee earnings of $1,870 for the week ended April 5, 2013. Compute the employer's payroll taxes for the period. The tax rates are: Social security tax, 6.2 percent; Medicare tax, 1.45 percent; FUTA tax, 0.8 percent; SUTA tax, 2.2 percent. All earnings are taxable. Record the employer's payroll taxes for the period on page 4 of a general journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
11-48 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
72. The payroll register of Reynolds Company showed total employee earnings of $2,320 for the week ended May 10, 2013. Compute the employer's payroll taxes for the period. The tax rates are: Social security tax, 6.2 percent; Medicare tax, 1.45 percent; FUTA tax, 0.8 percent; SUTA tax, 2.2 percent. All earnings are taxable. Record the employer's payroll taxes for the period on page 4 of a general journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
11-49 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
73. The payroll register of Burdick Travel Agency showed total employee earnings of $1,450 for the week ended June 7, 2013. Compute the employer's payroll taxes for the period. The tax rates are: Social security tax, 6.2 percent; Medicare tax, 1.45 percent; FUTA tax, 0.8 percent; SUTA tax, 2.2 percent. All earnings are taxable. Record the employer's payroll taxes for the period on page 4 of a general journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
11-50 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
74. The payroll register of Vtech Enterprises showed total employee earnings of $2,100 for the week ended August 2, 2013. Compute the employer's payroll taxes for the period. The tax rates are: Social security tax, 6.2 percent; Medicare tax, 1.45 percent; FUTA tax, 0.8 percent; SUTA tax, 2.2 percent. All earnings are taxable. Record the employer's payroll taxes for the period on page 4 of a general journal.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
75. Wharfside Manufacturing estimates that its office employees will earn $50,000 next year and its factory employees will earn $260,000. The firm pays the following rates for workers' compensation insurance: $0.37 per $100 of wages for the office employees and $4.00 per $100 of wages for the factory employees. Compute the estimated premiums for the office and factory employees. Office employees, $185; factory employees, $10,400
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 11-08 Compute and record workers' compensation insurance premiums. Level: Medium Topic: Unemployment Tax and Workers' Compensation
11-51 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
76. Beachside Manufacturing estimates that its office employees will earn $54,000 next year and its factory employees will earn $280,000. The firm pays the following rates for workers' compensation insurance: $0.40 per $100 of wages for the office employees and $4.10 per $100 of wages for the factory employees. Compute the estimated premiums for the office and factory employees. Office employees, $216; factory employees, $11,480
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 11-08 Compute and record workers' compensation insurance premiums. Level: Medium Topic: Unemployment Tax and Workers' Compensation
77. Orleans Manufacturing estimates that its office employees will earn $75,000 next year and its factory employees will earn $200,000. The firm pays the following rates for workers' compensation insurance: $0.55 per $100 of wages for the office employees and $4.75 per $100 of wages for the factory employees. Compute the estimated premiums for the office and factory employees. Office employees, $412.50; factory employees, $9,500
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 11-08 Compute and record workers' compensation insurance premiums. Level: Medium Topic: Unemployment Tax and Workers' Compensation
11-52 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
78. Compute and record workers' compensation insurance premiums for Fairlawn Manufacturing as follows: 1. The firm estimates that its office employees will earn $46,000 next year and its factory employees will earn $162,000. The firm pays the following rates for workers' compensation insurance: $0.40 per $100 of wages for the office employees and $3.50 per $100 of wages for the factory employees. Compute the estimated premiums for 2013. On page 9 of a general journal, record the payment of the estimated premium. Date the entry January 12, 2013. 2. On January 3, 2014, an audit of the firm's payroll records for 2013 showed that the firm had actually paid wages of $48,000 to its office employees and $165,000 to its factory employees. Compute the actual premium for the year and the balance due the insurance company or the credit due the firm. In the general journal, record the entry to adjust the Workers' Compensation Insurance Expense as of the end of 2013. Date the entry December 31, 2013.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 11-08 Compute and record workers' compensation insurance premiums. Level: Medium Topic: Unemployment Tax and Workers' Compensation
11-53 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
79. Compute and record workers' compensation insurance premiums for Evergreen Manufacturing as follows: 1. The firm estimates that its office employees will earn $49,000 next year and its factory employees will earn $150,000. The firm pays the following rates for workers' compensation insurance: $0.40 per $100 of wages for the office employees and $3.50 per $100 of wages for the factory employees. Compute the estimated premiums for 2013. On page 54 of a general journal, record the payment of the estimated premium. Date the entry January 12, 2013. 2. On January 4, 2014, an audit of the firm's payroll records for 2013 showed that the firm had actually paid wages of $53,000 to its office employees and $161,000 to its factory employees. Compute the actual premium for the year and the balance due the insurance company or the credit due the firm. In the general journal, record the entry to adjust the Workers' Compensation Insurance Expense as of the end of 2013. Date the entry December 31, 2013.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 11-08 Compute and record workers' compensation insurance premiums. Level: Medium Topic: Unemployment Tax and Workers' Compensation
11-54 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
80. Compute and record workers' compensation insurance premiums for Beverly Manufacturing as follows: 1. The firm estimates that its office employees will earn $40,000 next year and its factory employees will earn $172,000. The firm pays the following rates for workers' compensation insurance: $0.40 per $100 of wages for the office employees and $3.50 per $100 of wages for the factory employees. Compute the estimated premiums for 2013. On page 9 of a general journal, record the payment of the estimated premium. Date the entry January 12, 2013. 2. On January 3, 2014, an audit of the firm's payroll records for 2013 showed that the firm had actually paid wages of $48,000 to its office employees and $165,000 to its factory employees. Compute the actual premium for the year and the balance due the insurance company or the credit due the firm. In the general journal, record the entry to adjust the Workers' Compensation Insurance Expense as of the end of 2013. Date the entry December 31, 2013.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 11-08 Compute and record workers' compensation insurance premiums. Level: Medium Topic: Unemployment Tax and Workers' Compensation
11-55 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
81. A firm prepares copies of the Wage and Tax Statement, Form W-2, for which of the following? Check all that apply. ___1. One copy for the employee's records. ___2. One copy for the employer's records. ___3. One copy for the supervisor's records. ___4. One copy for city or county income tax. ___5. One copy for the employee to attach to the state income tax return. ___6. One copy for the employee to attach to the federal income tax return. ___7. One copy for the employer to send to the Social Security Administration ___8. One copy for the employee to send to the Social Security Administration 1, 2, 4, 5, 6, 7
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 11-05 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Level: Medium Topic: Unemployment Tax and Workers' Compensation
11-56 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Payroll Taxes, Deposits, and Reports
Matching Questions
82. Match the accounting terms with the description by entering the proper number. 1. Preprinted government form used by the employer to report payroll tax information relating to social security, Medicare, and employee income tax withholding to the Internal Revenue Transmittal of Wage and Service Tax Statements, Form W-3 5 2. Preprinted government form used by the employer to report unemployment taxes for the calendar year Experience rating system 3 3. A system that rewards an employer for maintaining steady employment conditions by Wage and Tax Statement, reducing the firm's state unemployment tax rate Form W-2 7 4. Another term for Wage and Tax Statement, Unemployment insurance Form W-2 program 8 Employer's Quarterly 5. Preprinted government form submitted with Federal Tax Return, Form Forms W-2 to the Social Security Administration 941 1 Employer's Annual Federal Unemployment Tax 6. Another term for Experience rating system Return, Form 940 2 7. Preprinted government form that contains information about an employee's earnings and tax withholdings for the year Withholding statement 4 8. A program that provides unemployment compensation through a tax levied on employers Merit rating system 6 AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 11-01 Explain how and when payroll taxes are paid to the government. Learning Objective: 11-02 Compute and record the employer's social security and Medicare taxes. Learning Objective: 11-03 Record deposit of social security; Medicare; and employee income taxes. Learning Objective: 11-04 Prepare an Employer's Quarterly Federal Tax Return; Form 941. Learning Objective: 11-05 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Learning Objective: 11-06 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Learning Objective: 11-07 Prepare an Employer's Federal Unemployment Tax Return; Form 940. Learning Objective: 11-08 Compute and record workers' compensation insurance premiums. Learning Objective: 11-09 Define the accounting terms new to this chapter. Level: Medium Topic: Social Security, Medicare, and Employee Income Tax Topic: Unemployment Tax and Workers' Compensation
11-57 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
Chapter 12 Accruals, Deferrals, and the Worksheet True / False Questions
1. When the accrual basis of accounting is used, expenses are recognized only in the period during which they are paid. True False
2. The balance of the Merchandise Inventory account that appears in the Trial Balance section of the worksheet represents the stock of goods on hand at the beginning of the current period. True False
3. The Merchandise Inventory account is debited when goods are purchased for resale and credited when goods are sold and delivered to customers. True False
4. Merchandise inventory is adjusted in two steps because both the beginning and ending inventory figures are needed to prepare the income statement. True False
5. To remove the beginning inventory from the books, the Income Summary account is credited for the amount of the beginning inventory. True False
6. Accrued expenses represent expense items that have been paid for and used in the current period. True False
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Chapter 12 - Accruals, Deferrals, and the Worksheet
7. Under the accrual basis of accounting, the expense for uncollectible accounts is estimated and recorded before specific accounts are actually written off. True False
8. The adjusting entry to allocate the cost of equipment to operations includes a debit to Accumulated Depreciation--Equipment and a credit to Depreciation Expense--Equipment. True False
9. A debit to Interest Receivable and a credit to Interest Income are needed to record interest that has been earned but not yet received. True False
10. Adjustments for accrued income always involve a credit to a revenue account. True False
11. Under the accrual basis of accounting, only income that has been earned appears on the income statement. True False
12. Income that is received before it is earned is called unearned, or deferred, income. True False
13. The objective of matching revenues and expenses to specific fiscal periods is most nearly attained when revenues and expenses are recognized in the period during which cash related to the transactions is received or paid. True False
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Chapter 12 - Accruals, Deferrals, and the Worksheet
14. The balance of the Merchandise Inventory account shown in the Adjusted Trial balance section of the worksheet is extended to the Balance Sheet Debit column of the worksheet. True False
15. The debit and credit amounts for the Income Summary account are combined into one number in the Income Statement section of the worksheet. True False
Fill in the Blank Questions
16. The stock of goods that a business has on hand for sale to customers is called ____________________. ________________________________________
17. The one account that appears on both the statement of owner's equity and the balance sheet is the ____________________ account. ________________________________________
18. The adjustment for merchandise inventory is made in ____________________ steps. ________________________________________
19. When a count is made of the goods on hand at the end of the period, the quantity of each type of goods in stock is listed on a form called a(n) ____________________. ________________________________________
20. The beginning merchandise inventory is removed from the books by closing the Merchandise Inventory account into the ____________________ account. ________________________________________
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Chapter 12 - Accruals, Deferrals, and the Worksheet
21. The entry to record the ending merchandise inventory in the books includes a ____________________ to the Merchandise Inventory account. ________________________________________
22. Expense items that relate to the current period but have not yet been paid for or recorded are called ____________________ expenses. ________________________________________
23. Property, plant, and equipment are ____________________ assets that require end-ofperiod adjustments for depreciation. ________________________________________
24. To determine the amount of yearly depreciation, the ____________________ is divided by the number of years in the asset's useful life. ________________________________________
25. When an adjusting entry is made for supplies used, an expense account is increased and a(n) ____________________ account is decreased. ________________________________________
26. Uncollectible Accounts Expense is a(n) ____________________ account. ________________________________________
27. The procedure that most nearly attains the objective of matching revenues and expenses to specific accounting periods is called the ____________________ basis of accounting. ________________________________________
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Chapter 12 - Accruals, Deferrals, and the Worksheet
28. The adjusting entry to record accrued interest on a note receivable increases the Interest Receivable account and ____________________ the Interest Income account. ________________________________________
29. If an account has a debit balance in the Trial Balance section and a debit entry in the Adjustments section, _______________ the two amounts. ________________________________________
30. Net income is recorded on the net income line in the ____________________ column of the Balance Sheet section of the worksheet. ________________________________________
Multiple Choice Questions
31. Purchases of merchandise are A. debited to Merchandise Inventory. B. credited to Merchandise Inventory. C. debited to Purchases. D. credited to Sales.
32. On the financial statements prepared at the end of an accounting period, the merchandise inventory is shown as A. a liability on the balance sheet. B. revenue on the income statement. C. an asset on the balance sheet. D. an addition to capital on the statement of owner's equity.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
33. Allowance for Doubtful Accounts is A. subtracted from Accounts Receivable in the Assets section of the balance sheet. B. deducted from Sales in the Revenue section of the income statement. C. listed in the Operating Expenses section of the income statement. D. listed in the Liabilities section of the balance sheet.
34. The adjusting entry for uncollectible accounts requires a debit to A. Allowance for Doubtful Accounts and a credit to Accounts Receivable. B. Uncollectible Accounts Expense and a credit to Allowance for Doubtful Accounts. C. Uncollectible Accounts Expense and a credit to Accounts Receivable. D. Allowance for Doubtful Accounts and a credit to Uncollectible Accounts Expense.
35. Which of the following statements is not correct? A. Uncollectible Accounts Expense is a contra asset account. B. The cost less the salvage value equals the depreciable base of a long-term asset. C. Each adjustment for an accrued expense includes a credit to a liability account. D. If a firm records prepaid expense items in an expense account when they pay for them, their adjustment at the end of the period to record the unexpired portion would include a debit to an asset account and a credit to an expense account.
36. The adjusting entry to record accrued interest on a note payable requires a debit to A. Interest Income and a credit to Notes Payable. B. Interest Payable and a credit to Interest Expense. C. Interest Expense and a credit to Cash. D. Interest Expense and a credit to Interest Payable.
37. Allowance for Doubtful Accounts is reported in the A. Assets section of the balance sheet. B. Operating Expenses section of the income statement. C. Liabilities section of the balance sheet. D. Cost of Goods Sold section of the income statement.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
38. On July 1, 2013, a firm purchased a 1-year insurance policy for $1,800 and paid the full premium in advance. The insurance expense associated with this policy for the year ending December 31, 2013, is A. $600. B. $1,050. C. $900. D. $1,800.
39. On May 1, 2014, a firm purchased a 1-year insurance policy for $3,600 and paid the full premium in advance. The insurance expense associated with this policy for the year ending December 31, 2014, is A. $3,600. B. $2,400. C. $2,100. D. $1,200.
40. On January 2, 2014, a firm purchased equipment for $8,500. Depreciation expense for the year ending December 31, 2014, given the straight-line method, a 5-year useful life, and a salvage value of $1,500, is A. $1,500. B. $1,700. C. $1,200. D. $1,400.
41. On January 1, 2014, a firm purchased machinery for $17,000. Depreciation expense for the year ending December 31, 2014, given the straight-line method, a 5-year useful life, and a salvage value of $3,000, is A. $3,000. B. $3,400. C. $2,800. D. $2,400.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
42. Accrued expenses are A. paid for in one period but not fully used until a later period. B. used in one period but not paid for until a later period. C. paid for, recorded, and used in one period. D. budgeted but not paid for or used during the period.
43. An adjusting entry is usually not required for a revenue item when it is A. budgeted, paid for, and partially earned in one period but not fully earned until a later period. B. paid for by the customer, recorded, and earned in one period. C. paid for by the customer and recorded in one period but not fully earned until a later period. D. earned in one period but not paid for by the customer or recorded until a later period.
44. Which of the following statements is correct? A. Income that has been earned but not yet received is called accrued income. B. Unearned Subscription Income is a liability account. C. Under the accrual basis of accounting, revenue is recognized and recorded in the period when it is earned regardless of when cash related to the transaction is received. D. All of the above statements are correct.
45. On November 1, 2013, a firm accepted a 4-month, 10 percent note for $900 from a customer with an overdue balance. The accrued interest recorded for this note for the year ended December 31, 2013, is A. $90. B. $75. C. $30. D. $15.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
46. On April 1, 2013, a firm accepted a 3-month, 10 percent note for $1,800 from a customer with an overdue balance. The accrued interest recorded for this note for the year ended May 31, 2013, is A. $30. B. $60. C. $150. D. $180.
47. With the accrual basis of accounting, it is appropriate to recognize revenue from a credit sale A. on the date of the sale. B. on the date the account is collected in full. C. each time a payment on an account balance is received. D. either on the date of the sale or when the amount of the sale is collected.
48. Accrued income is income that has been A. received but not earned. B. earned but not received. C. earned and received. D. budgeted for the fiscal period.
49. Which of the following statements is correct? A. On the worksheet, the amount of the ending merchandise inventory is shown in the Income Statement Credit column in the account Income Summary and the Balance Sheet Debit column in the account Merchandise Inventory. B. On the worksheet, the totals of the Income Statement columns should equal the totals of the Balance Sheet columns. C. On the worksheet, if debits exceed credits in the Adjusted Trial Balance section, the difference represents a net loss. D. All of the above statements are correct.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
50. If an account has a debit balance of $700 in the Trial Balance section of a worksheet and there is a credit entry of $200 in the Adjustments section, the account balance in the Adjusted Trial Balance section of the worksheet is a A. $900 debit. B. $500 debit. C. $500 credit. D. $900 credit.
51. If an account has a credit balance of $700 in the Trial Balance section of a worksheet and there is a credit entry of $200 in the Adjustments section, the account balance in the Adjusted Trial Balance section of the worksheet is A. $900 debit. B. $500 debit. C. $500 credit. D. $900 credit.
52. If an account has a debit balance of $700 in the Trial Balance section of a worksheet and there is a debit entry of $200 in the Adjustments section, the account balance in the Adjusted Trial Balance section of the worksheet is a A. $900 debit. B. $500 debit. C. $500 credit. D. $900 credit.
53. The net income for an accounting period appears on the worksheet in the A. Income Statement Debit column only. B. Income Statement Credit column only. C. Income Statement Credit and the Balance Sheet Debit columns. D. Income Statement Debit and the Balance Sheet Credit columns.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
54. The net income for an accounting period can be determined using the worksheet by comparing the balances and determining the difference between the balances in the two A. only the Income Statement columns. B. Income Statement or Balance Sheet columns. C. Balance Sheet and Income Statement Debit columns. D. Balance Sheet and Income Statement Credit columns.
55. The ending merchandise inventory is recorded on the worksheet in the A. Income Statement Credit and the Balance Sheet Debit columns. B. Income Statement Credit column only. C. Balance Sheet Debit column only. D. Income Statement Debit column only.
56. On November 1, 2013, Paige Turner Publishing received $50,400 in cash for subscriptions covering one year, recording the entry as a debit to Cash and a credit to Unearned Subscriptions. The correct adjusting entry at December 31, 2013, is A. Debit Subscriptions Income $8,400; credit Unearned Subscriptions $8,400. B. Debit Unearned Subscriptions $8,400; credit Subscriptions Income $8,400. C. Debit Unearned Subscriptions $4,200; credit Subscriptions Income $4,200. D. Debit Unearned Subscriptions $50,400; credit Subscriptions Income $50,400.
57. The Supplies account has a trial balance of $3,136. A year-end inventory shows $1,734 worth of supplies left at the end of the year. The correct adjusting entry is: A. debit Supplies Expense $1,734; credit Prepaid Supplies $1,734 B. debit Supplies $1,402; credit Supplies Expense $1,402 C. debit Supplies Expense $3,136; credit Supplies $3,136 D. debit Supplies Expense $1,402; credit Supplies $1,402
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Chapter 12 - Accruals, Deferrals, and the Worksheet
58. Hugh Morris Company pays weekly wages of $10,000 every Friday for a five day week ending on that day. If the last day of the year is on Wednesday, the adjusting entry to record the accrued wages is: A. debit Wages Expense $6,000; credit Cash $6,000 B. debit Wages Expense $4,000; credit Cash $4,000 C. debit Wages Expense $6,000; credit Wages Payable $6,000 D. debit Wages Expense $6,000; credit Drawing $6,000
59. Robin Banks, Inc. owns an armored truck which was purchased for $80,000. The Accumulated Depreciation on the truck is $55,000. The book value of the armored truck is A. $25,000 B. $80,000 C. $55,000 D. $135,000
60. After both of the entries for the inventory adjustment have been posted the debit in the Income Summary account represents: A. Net Income B. Ending Inventory C. Beginning Inventory D. Cost of Goods Sold
61. Rose Bush Nursery purchased a delivery truck for $27,000. The truck is expected to have a useful life of 4 years and a residual value of $1,080. If the truck was purchased on June 1, 2013, what is the amount of depreciation expense for the truck for the year ended December 31, 2013? A. $3,780 B. $1,080 C. $6,480 D. $3,240
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Chapter 12 - Accruals, Deferrals, and the Worksheet
62. Stan Still Stationery Store's employees are paid every Friday for a five day work week and are paid a total of $1,250 per day. If December 31, 2013, is on a Monday, the amount of the adjusting entry for accrued wages is: A. $1,250 B. $5,000 C. $6,250 D. $3,750
63. On October 1, 2013, a firm accepted a 4-month, 8% note for $12,000 from a customer with an overdue account balance. The accrued interest recorded for this note on December 31, 2013, is A. $960.00 B. $80.00 C. $240.00 D. No accrual is necessary
64. Prepaid Advertising has a debit balance in the Trial Balance section of the worksheet of $1,500 and a credit entry of $500 in the adjustments section of the worksheet, the balance of Prepaid Advertising in the Adjusted Trial Balance section of the worksheet is a A. $1,000 credit B. $500 debit C. $1,000 debit D. $1,500 debit
65. Abe & Anna Split Ice Cream Parlour paid $1,800 cash for a 6-month advertising contract on September 30, 2013. The amount of advertising expense reported on the Income Statement for the year ending December 31, 2013, for this advertising contract is A. $900 B. $300 C. $1,800 D. $1,200
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Chapter 12 - Accruals, Deferrals, and the Worksheet
Short Answer Questions
66. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. The beginning inventory for a merchandising business was $73,000, and the ending inventory is $66,000.
67. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. The beginning inventory for a merchandising business was $32,000, and the ending inventory is $45,000.
68. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. During the year, the firm had net credit sales of $490,000. Past experience shows that 1.2 percent of the firm's net credit sales result in uncollectible accounts.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
69. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. During the year, the firm had net credit sales of $980,000. Past experience shows that 1.2 percent of the firm's net credit sales result in uncollectible accounts.
70. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. Equipment purchased for $52,000 on January 3, 2013, has an estimated life of 5 years and an estimated salvage value of $4,500. The firm uses the straight-line method of depreciation. Determine the adjustment for the month ended January 31, 2013.
71. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. Equipment purchased for $104,000 on January 3, 2014, has an estimated life of 5 years and an estimated salvage value of $9,000. The firm uses the straight-line method of depreciation. Determine the adjustment for the month ended January 31, 2014.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
72. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. On December 31, 2013, the firm owed wages totaling $4,300.
73. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. On December 31, 2013, the firm owed wages totaling $3,900.
74. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. On December 31, 2013, the Notes Payable account had a balance of $6,000. This represented a 3-month, 9 percent note issued on December 1, 2013.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
75. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. On December 31, 2013, the Notes Payable account had a balance of $12,000. This represented a 3-month, 9 percent note issued on December 1, 2013.
76. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. The Supplies account has a balance of $1,300. On December 31, 2013, an inventory of supplies showed that items costing $550 were on hand.
77. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. The Supplies account has a balance of $1,400. On December 31, 2010, an inventory of supplies showed that items costing $500 were on hand.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
78. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. On October 1, 2013, the firm paid a premium of $2,800 in cash for a 1-year insurance policy. On December 31, 2013, coverage for a period of three months had expired.
79. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. On October 1, 2013, the firm paid a premium of $5,600 in cash for a 1-year insurance policy. On December 31, 2013, coverage for a period of three months had expired.
80. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. During December, the firm received $6,000 in fees in advance and properly recorded the amount as Unearned Fees. An analysis shows that $2,000 applies to services provided in December.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
81. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. During December, the firm received $12,000 in fees in advance and properly recorded the amount as Unearned Fees. An analysis shows that $4,000 applies to services provided in December.
82. On July 31, 2013, after one month of operation, the general ledger of Dakota Consulting contained the following accounts and balances. The firm adjusts losses from uncollectible accounts only at the end of the fiscal year. Monthly adjustments are listed below. Prepare the Trial Balance, Adjustments, and Adjusted Trial Balance sections of a worksheet.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
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Chapter 12 - Accruals, Deferrals, and the Worksheet
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Chapter 12 - Accruals, Deferrals, and the Worksheet
83. Design Home Furnishings is a retail store. On December 31, 2014, the firm's general ledger contained the following accounts and balances. Adjustments are shown below. Prepare the Trial Balance section, record the adjustments in the Adjustments section, and complete the worksheet for the year ended December 31, 2014. Round to the nearest whole dollar.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
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Chapter 12 - Accruals, Deferrals, and the Worksheet
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Chapter 12 - Accruals, Deferrals, and the Worksheet
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Chapter 12 - Accruals, Deferrals, and the Worksheet
84. Complete the table below in accordance with the rules that must be followed to combine amounts in the Adjusted Trial Balance Section of the worksheet. Enter the new balance and whether it is entered as a debit or a credit.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
Matching Questions
85. Match the accounting terms with the description by entering the proper number.
1. A form used to list the volume and type of goods a firm has in stock 2. The amounts entered in the Adjusted Trial Balance section of the worksheet
Property, plant, and equipment ____ Inventory sheet ____ Deferred income ____ Prepaid expenses ____
3. Income received before it is earned 4. Expenses that are paid for and recorded before they are used, such as rent or insurance 5. Expense items that relate to the current period but have not yet been paid and do not yet appear in the accounting Updated records account balances ____ 6. Long-term assets that are used in the operation of a business and that are subject to depreciation (except for Accrued land, which is not depreciated) expenses ____ Deferred 7. Another term for unearned income expenses ____ 8. Income that has been earned but not yet received and recorded Accrual basis ____ 9. The difference between the debit and credit columns of the Income Statement and the debit and credit columns of Accrued the Balance Sheet on the worksheet income ____ 10. A system of accounting by which all revenues and expenses are matched and reported on financial statements for the applicable period, regardless of when Net income or the cash related to the transaction is received or paid Net Loss ____ Unearned 11. Another term for prepaid expenses income ____
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Chapter 12 - Accruals, Deferrals, and the Worksheet
Chapter 12 Accruals, Deferrals, and the Worksheet Answer Key
True / False Questions
1. When the accrual basis of accounting is used, expenses are recognized only in the period during which they are paid. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
2. The balance of the Merchandise Inventory account that appears in the Trial Balance section of the worksheet represents the stock of goods on hand at the beginning of the current period. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
3. The Merchandise Inventory account is debited when goods are purchased for resale and credited when goods are sold and delivered to customers. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
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Chapter 12 - Accruals, Deferrals, and the Worksheet
4. Merchandise inventory is adjusted in two steps because both the beginning and ending inventory figures are needed to prepare the income statement. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
5. To remove the beginning inventory from the books, the Income Summary account is credited for the amount of the beginning inventory. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
6. Accrued expenses represent expense items that have been paid for and used in the current period. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
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Chapter 12 - Accruals, Deferrals, and the Worksheet
7. Under the accrual basis of accounting, the expense for uncollectible accounts is estimated and recorded before specific accounts are actually written off. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
8. The adjusting entry to allocate the cost of equipment to operations includes a debit to Accumulated Depreciation--Equipment and a credit to Depreciation Expense--Equipment. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
9. A debit to Interest Receivable and a credit to Interest Income are needed to record interest that has been earned but not yet received. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 12-03 Compute adjustments for accrued and deferred income items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
10. Adjustments for accrued income always involve a credit to a revenue account. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 12-03 Compute adjustments for accrued and deferred income items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
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Chapter 12 - Accruals, Deferrals, and the Worksheet
11. Under the accrual basis of accounting, only income that has been earned appears on the income statement. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 12-03 Compute adjustments for accrued and deferred income items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
12. Income that is received before it is earned is called unearned, or deferred, income. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 12-03 Compute adjustments for accrued and deferred income items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
13. The objective of matching revenues and expenses to specific fiscal periods is most nearly attained when revenues and expenses are recognized in the period during which cash related to the transactions is received or paid. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Learning Objective: 12-03 Compute adjustments for accrued and deferred income items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
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Chapter 12 - Accruals, Deferrals, and the Worksheet
14. The balance of the Merchandise Inventory account shown in the Adjusted Trial balance section of the worksheet is extended to the Balance Sheet Debit column of the worksheet. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 12-04 Complete a 10-column worksheet. Level: Medium Topic: Completing the Worksheet
15. The debit and credit amounts for the Income Summary account are combined into one number in the Income Statement section of the worksheet. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 12-04 Complete a 10-column worksheet. Level: Medium Topic: Completing the Worksheet
Fill in the Blank Questions
16. The stock of goods that a business has on hand for sale to customers is called ____________________. merchandise inventory
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
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Chapter 12 - Accruals, Deferrals, and the Worksheet
17. The one account that appears on both the statement of owner's equity and the balance sheet is the ____________________ account. Capital
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
18. The adjustment for merchandise inventory is made in ____________________ steps. two
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
19. When a count is made of the goods on hand at the end of the period, the quantity of each type of goods in stock is listed on a form called a(n) ____________________. inventory sheet
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
20. The beginning merchandise inventory is removed from the books by closing the Merchandise Inventory account into the ____________________ account. Income Summary
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
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Chapter 12 - Accruals, Deferrals, and the Worksheet
21. The entry to record the ending merchandise inventory in the books includes a ____________________ to the Merchandise Inventory account. debit
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
22. Expense items that relate to the current period but have not yet been paid for or recorded are called ____________________ expenses. accrued
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
23. Property, plant, and equipment are ____________________ assets that require end-ofperiod adjustments for depreciation. long-term
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
24. To determine the amount of yearly depreciation, the ____________________ is divided by the number of years in the asset's useful life. depreciable base
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
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Chapter 12 - Accruals, Deferrals, and the Worksheet
25. When an adjusting entry is made for supplies used, an expense account is increased and a(n) ____________________ account is decreased. asset
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
26. Uncollectible Accounts Expense is a(n) ____________________ account. expense
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
27. The procedure that most nearly attains the objective of matching revenues and expenses to specific accounting periods is called the ____________________ basis of accounting. accrual
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Learning Objective: 12-03 Compute adjustments for accrued and deferred income items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
28. The adjusting entry to record accrued interest on a note receivable increases the Interest Receivable account and ____________________ the Interest Income account. increases
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 12-03 Compute adjustments for accrued and deferred income items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
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Chapter 12 - Accruals, Deferrals, and the Worksheet
29. If an account has a debit balance in the Trial Balance section and a debit entry in the Adjustments section, _______________ the two amounts. add
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 12-04 Complete a 10-column worksheet. Level: Easy Topic: Completing the Worksheet
30. Net income is recorded on the net income line in the ____________________ column of the Balance Sheet section of the worksheet. credit
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 12-04 Complete a 10-column worksheet. Level: Easy Topic: Completing the Worksheet
Multiple Choice Questions
31. Purchases of merchandise are A. debited to Merchandise Inventory. B. credited to Merchandise Inventory. C. debited to Purchases. D. credited to Sales.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
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Chapter 12 - Accruals, Deferrals, and the Worksheet
32. On the financial statements prepared at the end of an accounting period, the merchandise inventory is shown as A. a liability on the balance sheet. B. revenue on the income statement. C. an asset on the balance sheet. D. an addition to capital on the statement of owner's equity.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
33. Allowance for Doubtful Accounts is A. subtracted from Accounts Receivable in the Assets section of the balance sheet. B. deducted from Sales in the Revenue section of the income statement. C. listed in the Operating Expenses section of the income statement. D. listed in the Liabilities section of the balance sheet.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
34. The adjusting entry for uncollectible accounts requires a debit to A. Allowance for Doubtful Accounts and a credit to Accounts Receivable. B. Uncollectible Accounts Expense and a credit to Allowance for Doubtful Accounts. C. Uncollectible Accounts Expense and a credit to Accounts Receivable. D. Allowance for Doubtful Accounts and a credit to Uncollectible Accounts Expense.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
12-37 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
35. Which of the following statements is not correct? A. Uncollectible Accounts Expense is a contra asset account. B. The cost less the salvage value equals the depreciable base of a long-term asset. C. Each adjustment for an accrued expense includes a credit to a liability account. D. If a firm records prepaid expense items in an expense account when they pay for them, their adjustment at the end of the period to record the unexpired portion would include a debit to an asset account and a credit to an expense account.
AACSB: Reflective Thinking AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
36. The adjusting entry to record accrued interest on a note payable requires a debit to A. Interest Income and a credit to Notes Payable. B. Interest Payable and a credit to Interest Expense. C. Interest Expense and a credit to Cash. D. Interest Expense and a credit to Interest Payable.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
37. Allowance for Doubtful Accounts is reported in the A. Assets section of the balance sheet. B. Operating Expenses section of the income statement. C. Liabilities section of the balance sheet. D. Cost of Goods Sold section of the income statement.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
12-38 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
38. On July 1, 2013, a firm purchased a 1-year insurance policy for $1,800 and paid the full premium in advance. The insurance expense associated with this policy for the year ending December 31, 2013, is A. $600. B. $1,050. C. $900. D. $1,800.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
39. On May 1, 2014, a firm purchased a 1-year insurance policy for $3,600 and paid the full premium in advance. The insurance expense associated with this policy for the year ending December 31, 2014, is A. $3,600. B. $2,400. C. $2,100. D. $1,200.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
12-39 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
40. On January 2, 2014, a firm purchased equipment for $8,500. Depreciation expense for the year ending December 31, 2014, given the straight-line method, a 5-year useful life, and a salvage value of $1,500, is A. $1,500. B. $1,700. C. $1,200. D. $1,400.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
41. On January 1, 2014, a firm purchased machinery for $17,000. Depreciation expense for the year ending December 31, 2014, given the straight-line method, a 5-year useful life, and a salvage value of $3,000, is A. $3,000. B. $3,400. C. $2,800. D. $2,400.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
42. Accrued expenses are A. paid for in one period but not fully used until a later period. B. used in one period but not paid for until a later period. C. paid for, recorded, and used in one period. D. budgeted but not paid for or used during the period.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
12-40 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
43. An adjusting entry is usually not required for a revenue item when it is A. budgeted, paid for, and partially earned in one period but not fully earned until a later period. B. paid for by the customer, recorded, and earned in one period. C. paid for by the customer and recorded in one period but not fully earned until a later period. D. earned in one period but not paid for by the customer or recorded until a later period.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
44. Which of the following statements is correct? A. Income that has been earned but not yet received is called accrued income. B. Unearned Subscription Income is a liability account. C. Under the accrual basis of accounting, revenue is recognized and recorded in the period when it is earned regardless of when cash related to the transaction is received. D. All of the above statements are correct.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 12-03 Compute adjustments for accrued and deferred income items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
45. On November 1, 2013, a firm accepted a 4-month, 10 percent note for $900 from a customer with an overdue balance. The accrued interest recorded for this note for the year ended December 31, 2013, is A. $90. B. $75. C. $30. D. $15.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-03 Compute adjustments for accrued and deferred income items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
12-41 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
46. On April 1, 2013, a firm accepted a 3-month, 10 percent note for $1,800 from a customer with an overdue balance. The accrued interest recorded for this note for the year ended May 31, 2013, is A. $30. B. $60. C. $150. D. $180.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-03 Compute adjustments for accrued and deferred income items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
47. With the accrual basis of accounting, it is appropriate to recognize revenue from a credit sale A. on the date of the sale. B. on the date the account is collected in full. C. each time a payment on an account balance is received. D. either on the date of the sale or when the amount of the sale is collected.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
48. Accrued income is income that has been A. received but not earned. B. earned but not received. C. earned and received. D. budgeted for the fiscal period.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 12-03 Compute adjustments for accrued and deferred income items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
12-42 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
49. Which of the following statements is correct? A. On the worksheet, the amount of the ending merchandise inventory is shown in the Income Statement Credit column in the account Income Summary and the Balance Sheet Debit column in the account Merchandise Inventory. B. On the worksheet, the totals of the Income Statement columns should equal the totals of the Balance Sheet columns. C. On the worksheet, if debits exceed credits in the Adjusted Trial Balance section, the difference represents a net loss. D. All of the above statements are correct.
AACSB: Reflective Thinking AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 12-04 Complete a 10-column worksheet. Level: Medium Topic: Completing the Worksheet
50. If an account has a debit balance of $700 in the Trial Balance section of a worksheet and there is a credit entry of $200 in the Adjustments section, the account balance in the Adjusted Trial Balance section of the worksheet is a A. $900 debit. B. $500 debit. C. $500 credit. D. $900 credit.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-04 Complete a 10-column worksheet. Level: Medium Topic: Completing the Worksheet
12-43 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
51. If an account has a credit balance of $700 in the Trial Balance section of a worksheet and there is a credit entry of $200 in the Adjustments section, the account balance in the Adjusted Trial Balance section of the worksheet is A. $900 debit. B. $500 debit. C. $500 credit. D. $900 credit.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-04 Complete a 10-column worksheet. Level: Medium Topic: Completing the Worksheet
52. If an account has a debit balance of $700 in the Trial Balance section of a worksheet and there is a debit entry of $200 in the Adjustments section, the account balance in the Adjusted Trial Balance section of the worksheet is a A. $900 debit. B. $500 debit. C. $500 credit. D. $900 credit.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-04 Complete a 10-column worksheet. Level: Medium Topic: Completing the Worksheet
53. The net income for an accounting period appears on the worksheet in the A. Income Statement Debit column only. B. Income Statement Credit column only. C. Income Statement Credit and the Balance Sheet Debit columns. D. Income Statement Debit and the Balance Sheet Credit columns.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 12-04 Complete a 10-column worksheet. Level: Easy Topic: Completing the Worksheet
12-44 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
54. The net income for an accounting period can be determined using the worksheet by comparing the balances and determining the difference between the balances in the two A. only the Income Statement columns. B. Income Statement or Balance Sheet columns. C. Balance Sheet and Income Statement Debit columns. D. Balance Sheet and Income Statement Credit columns.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 12-04 Complete a 10-column worksheet. Level: Hard Topic: Completing the Worksheet
55. The ending merchandise inventory is recorded on the worksheet in the A. Income Statement Credit and the Balance Sheet Debit columns. B. Income Statement Credit column only. C. Balance Sheet Debit column only. D. Income Statement Debit column only.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 12-04 Complete a 10-column worksheet. Level: Medium Topic: Completing the Worksheet
56. On November 1, 2013, Paige Turner Publishing received $50,400 in cash for subscriptions covering one year, recording the entry as a debit to Cash and a credit to Unearned Subscriptions. The correct adjusting entry at December 31, 2013, is A. Debit Subscriptions Income $8,400; credit Unearned Subscriptions $8,400. B. Debit Unearned Subscriptions $8,400; credit Subscriptions Income $8,400. C. Debit Unearned Subscriptions $4,200; credit Subscriptions Income $4,200. D. Debit Unearned Subscriptions $50,400; credit Subscriptions Income $50,400.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
12-45 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
57. The Supplies account has a trial balance of $3,136. A year-end inventory shows $1,734 worth of supplies left at the end of the year. The correct adjusting entry is: A. debit Supplies Expense $1,734; credit Prepaid Supplies $1,734 B. debit Supplies $1,402; credit Supplies Expense $1,402 C. debit Supplies Expense $3,136; credit Supplies $3,136 D. debit Supplies Expense $1,402; credit Supplies $1,402
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
58. Hugh Morris Company pays weekly wages of $10,000 every Friday for a five day week ending on that day. If the last day of the year is on Wednesday, the adjusting entry to record the accrued wages is: A. debit Wages Expense $6,000; credit Cash $6,000 B. debit Wages Expense $4,000; credit Cash $4,000 C. debit Wages Expense $6,000; credit Wages Payable $6,000 D. debit Wages Expense $6,000; credit Drawing $6,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
59. Robin Banks, Inc. owns an armored truck which was purchased for $80,000. The Accumulated Depreciation on the truck is $55,000. The book value of the armored truck is A. $25,000 B. $80,000 C. $55,000 D. $135,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
12-46 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
60. After both of the entries for the inventory adjustment have been posted the debit in the Income Summary account represents: A. Net Income B. Ending Inventory C. Beginning Inventory D. Cost of Goods Sold
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
61. Rose Bush Nursery purchased a delivery truck for $27,000. The truck is expected to have a useful life of 4 years and a residual value of $1,080. If the truck was purchased on June 1, 2013, what is the amount of depreciation expense for the truck for the year ended December 31, 2013? A. $3,780 B. $1,080 C. $6,480 D. $3,240
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
12-47 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
62. Stan Still Stationery Store's employees are paid every Friday for a five day work week and are paid a total of $1,250 per day. If December 31, 2013, is on a Monday, the amount of the adjusting entry for accrued wages is: A. $1,250 B. $5,000 C. $6,250 D. $3,750
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
63. On October 1, 2013, a firm accepted a 4-month, 8% note for $12,000 from a customer with an overdue account balance. The accrued interest recorded for this note on December 31, 2013, is A. $960.00 B. $80.00 C. $240.00 D. No accrual is necessary
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
12-48 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
64. Prepaid Advertising has a debit balance in the Trial Balance section of the worksheet of $1,500 and a credit entry of $500 in the adjustments section of the worksheet, the balance of Prepaid Advertising in the Adjusted Trial Balance section of the worksheet is a A. $1,000 credit B. $500 debit C. $1,000 debit D. $1,500 debit
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-04 Complete a 10-column worksheet. Level: Easy Topic: Completing the Worksheet
65. Abe & Anna Split Ice Cream Parlour paid $1,800 cash for a 6-month advertising contract on September 30, 2013. The amount of advertising expense reported on the Income Statement for the year ending December 31, 2013, for this advertising contract is A. $900 B. $300 C. $1,800 D. $1,200
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
12-49 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
Short Answer Questions
66. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. The beginning inventory for a merchandising business was $73,000, and the ending inventory is $66,000. First entry: Debit Income Summary, $73,000; credit Merchandise Inventory, $73,000 Second entry: Debit Merchandise Inventory, $66,000; credit Income Summary, $66,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
67. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. The beginning inventory for a merchandising business was $32,000, and the ending inventory is $45,000. First entry: Debit Income Summary, $32,000; credit Merchandise Inventory, $32,000 Second entry: Debit Merchandise Inventory, $45,000; credit Income Summary, $45,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
12-50 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
68. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. During the year, the firm had net credit sales of $490,000. Past experience shows that 1.2 percent of the firm's net credit sales result in uncollectible accounts. Debit Uncollectible Accounts Expense, $5,880; credit Allowance for Doubtful Accounts, $5,880
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
69. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. During the year, the firm had net credit sales of $980,000. Past experience shows that 1.2 percent of the firm's net credit sales result in uncollectible accounts. Debit Uncollectible Accounts Expense, $11,760; credit Allowance for Doubtful Accounts, $11,760
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
12-51 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
70. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. Equipment purchased for $52,000 on January 3, 2013, has an estimated life of 5 years and an estimated salvage value of $4,500. The firm uses the straight-line method of depreciation. Determine the adjustment for the month ended January 31, 2013. Debit Depreciation Expense--Equipment, $791.67; credit Accumulated Depreciation-Equipment, $791.67
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
71. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. Equipment purchased for $104,000 on January 3, 2014, has an estimated life of 5 years and an estimated salvage value of $9,000. The firm uses the straight-line method of depreciation. Determine the adjustment for the month ended January 31, 2014. Debit Depreciation Expense--Equipment, $1,583.33; credit Accumulated Depreciation-Equipment, $1,583.33
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
12-52 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
72. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. On December 31, 2013, the firm owed wages totaling $4,300. Debit Wages Expense, $4,300; credit Wages Payable, $4,300
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
73. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. On December 31, 2013, the firm owed wages totaling $3,900. Debit Wages Expense, $3,900; credit Wages Payable, $3,900
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Easy Topic: Calculating and Recording Adjustments
74. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. On December 31, 2013, the Notes Payable account had a balance of $6,000. This represented a 3-month, 9 percent note issued on December 1, 2013. Debit Interest Expense, $45; credit Interest Payable, $45
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
12-53 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
75. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. On December 31, 2013, the Notes Payable account had a balance of $12,000. This represented a 3-month, 9 percent note issued on December 1, 2013. Debit Interest Expense, $90; credit Interest Payable, $90
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
76. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. The Supplies account has a balance of $1,300. On December 31, 2013, an inventory of supplies showed that items costing $550 were on hand. Debit Supplies Expense, $750; credit Supplies, $750
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
77. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. The Supplies account has a balance of $1,400. On December 31, 2010, an inventory of supplies showed that items costing $500 were on hand. Debit Supplies Expense, $900; credit Supplies, $900
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
12-54 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
78. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. On October 1, 2013, the firm paid a premium of $2,800 in cash for a 1-year insurance policy. On December 31, 2013, coverage for a period of three months had expired. Debit Insurance Expense, $700; credit Prepaid Insurance, $700
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
79. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. On October 1, 2013, the firm paid a premium of $5,600 in cash for a 1-year insurance policy. On December 31, 2013, coverage for a period of three months had expired. Debit Insurance Expense, $1,400; credit Prepaid Insurance, $1,400
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
80. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. During December, the firm received $6,000 in fees in advance and properly recorded the amount as Unearned Fees. An analysis shows that $2,000 applies to services provided in December. Debit Unearned Fees, $2,000; credit Fees Earned, $2,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-03 Compute adjustments for accrued and deferred income items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
12-55 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 12 - Accruals, Deferrals, and the Worksheet
81. Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. During December, the firm received $12,000 in fees in advance and properly recorded the amount as Unearned Fees. An analysis shows that $4,000 applies to services provided in December. Debit Unearned Fees, $4,000; credit Fees Earned, $4,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 12-03 Compute adjustments for accrued and deferred income items; and enter the adjustments on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
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Chapter 12 - Accruals, Deferrals, and the Worksheet
82. On July 31, 2013, after one month of operation, the general ledger of Dakota Consulting contained the following accounts and balances. The firm adjusts losses from uncollectible accounts only at the end of the fiscal year. Monthly adjustments are listed below. Prepare the Trial Balance, Adjustments, and Adjusted Trial Balance sections of a worksheet.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
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Chapter 12 - Accruals, Deferrals, and the Worksheet
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Chapter 12 - Accruals, Deferrals, and the Worksheet
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Chapter 12 - Accruals, Deferrals, and the Worksheet
AACSB: Analytic AICPA FN: Reporting Bloom's: Create Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Learning Objective: 12-03 Compute adjustments for accrued and deferred income items; and enter the adjustments on the worksheet. Learning Objective: 12-04 Complete a 10-column worksheet. Level: Hard Topic: Calculating and Recording Adjustments Topic: Completing the Worksheet
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Chapter 12 - Accruals, Deferrals, and the Worksheet
83. Design Home Furnishings is a retail store. On December 31, 2014, the firm's general ledger contained the following accounts and balances. Adjustments are shown below. Prepare the Trial Balance section, record the adjustments in the Adjustments section, and complete the worksheet for the year ended December 31, 2014. Round to the nearest whole dollar.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
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Chapter 12 - Accruals, Deferrals, and the Worksheet
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Chapter 12 - Accruals, Deferrals, and the Worksheet
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Chapter 12 - Accruals, Deferrals, and the Worksheet
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Chapter 12 - Accruals, Deferrals, and the Worksheet
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Chapter 12 - Accruals, Deferrals, and the Worksheet
AACSB: Analytic AICPA FN: Reporting Bloom's: Create Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Learning Objective: 12-02 Compute adjustments for accrued and prepaid expense items; and enter the adjustments on the worksheet. Learning Objective: 12-03 Compute adjustments for accrued and deferred income items; and enter the adjustments on the worksheet. Learning Objective: 12-04 Complete a 10-column worksheet. Level: Hard Topic: Calculating and Recording Adjustments Topic: Completing the Worksheet
84. Complete the table below in accordance with the rules that must be followed to combine amounts in the Adjusted Trial Balance Section of the worksheet. Enter the new balance and whether it is entered as a debit or a credit.
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Chapter 12 - Accruals, Deferrals, and the Worksheet
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 12-04 Complete a 10-column worksheet. Level: Medium Topic: Completing the Worksheet
Matching Questions
85. Match the accounting terms with the description by entering the proper number.
1. A form used to list the volume and type of goods a firm has in stock 2. The amounts entered in the Adjusted Trial Balance section of the worksheet 3. Income received before it is earned 4. Expenses that are paid for and recorded before they are used, such as rent or insurance 5. Expense items that relate to the current period but have not yet been paid and do not yet appear in the accounting records 6. Long-term assets that are used in the operation of a business and that are subject to depreciation (except for land, which is not depreciated) 7. Another term for unearned income 8. Income that has been earned but not yet received and recorded 9. The difference between the debit and credit columns of the Income Statement and the debit and credit columns of the Balance Sheet on the worksheet 10. A system of accounting by which all revenues and expenses are matched and reported on financial statements for the applicable period, regardless of when the cash related to the transaction is received or paid 11. Another term for prepaid expenses
Property, plant, and equipment 6 Inventory sheet 1 Deferred income 7 Prepaid expenses 4 Updated account balances 2 Accrued expenses 5 Deferred expenses 11 Accrual basis 10 Accrued income 8
Net income or Net Loss 9 Unearned income 3
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 12-01 Determine the adjustment for merchandise inventory; and enter the adjustment on the worksheet. Level: Medium Topic: Calculating and Recording Adjustments
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Chapter 13 - Financial Statements and Closing Procedures
Chapter 13 Financial Statements and Closing Procedures True / False Questions
1. The total of the operating expenses for the period is deducted from the gross profit on sales to determine the net income or net loss from operations. True False
2. The balance of the Sales Returns and Allowances account is reported as a selling expense in Operating Expenses section of a multiple-step income statement. True False
3. Interest on notes payable would be listed in the Other Income section of a classified income statement. True False
4. If a firm experiences a net loss, this amount is placed in parentheses on the income statement. True False
5. The statement of owner's equity is prepared before the balance sheet so that the beginning owner's equity balance is available for the balance sheet. True False
6. Current assets provide the funds needed to pay bills and meet expenses. True False
7. Current assets are usually listed on a balance sheet in order of liquidity. True False
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Chapter 13 - Financial Statements and Closing Procedures
8. Adjusting entries in the general journal do not require detailed explanations since the information about the entries is listed on the worksheet. True False
9. After all adjusting entries are posted, the balances of the general ledger accounts should match the amounts shown in the Adjusted Trial Balance section of the worksheet. True False
10. If the Income Summary account has a credit balance after revenues, and expenses are closed, the firm had a net income for the fiscal period. True False
11. The Income Summary credit amount appearing in the Income Statement section of the worksheet is included in the combined entry to close the revenue and other accounts with credit balances. True False
12. When a firm experiences a net loss, the owner's capital is decreased. True False
13. At the end of the period, the balance of the Accounts Receivable account is closed to the Income Summary account. True False
14. The adjusting entry to record depreciation should be reversed at the start of a new fiscal period to make subsequent financial record keeping easier. True False
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Chapter 13 - Financial Statements and Closing Procedures
15. When prepaid expense items are initially recorded as assets, the end-of-period adjustments for these items should be reversed. True False
Fill in the Blank Questions
16. The difference between net sales and the cost of goods sold is called the ____________________ on sales. ________________________________________
17. When several subtotals and totals are computed before the net income is presented, the income statement is referred to as a ____________________ income statement. ________________________________________
18. A net loss for the period and withdrawals by the owner cause a ____________________ in capital. ________________________________________
19. Cash, items that will normally be converted to cash within one year, and items that will be used up within one year are called ____________________ assets. ________________________________________
20. On a classified balance sheet, Accounts Payable would appear in the ____________________ section. ________________________________________
21. The ____________________ of a building is the portion of the original cost that has not yet been depreciated. ________________________________________
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Chapter 13 - Financial Statements and Closing Procedures
22. The balance sheet is arranged in a ____________________ format if assets and liabilities are divided into groups of similar accounts and a subtotal is given for each group. ________________________________________
23. Each balance appearing in the ____________________ section of the worksheet is closed into the Income Summary account. ________________________________________
24. After the ____________________ entries are posted, the Sales account will have a zero balance. ________________________________________
25. A gross profit percentage of 45 percent means that for every $1 of net sales, gross profit amounts to ____________________. ________________________________________
26. The inventory ____________________ represents the time period it takes from the purchase of the inventory until it is sold. ________________________________________
27. Each reversing entry is the exact opposite of the related ____________________ entry. ________________________________________
28. An adjusting entry was made for accrued salaries of $600 at the end of 2013. The adjusting entry was then reversed. To record the first payroll of 2014, which totaled $1,500, Salaries Expense should be debited for ____________________. ________________________________________
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Chapter 13 - Financial Statements and Closing Procedures
29. The entry to reverse an adjustment for accrued interest expense includes a debit to ____________________. ________________________________________
30. If ____________________ entries are recorded, there is no need to examine each transaction in the new fiscal period to see whether a portion applies to a past period and then divide the amount of the transaction between the two periods. ________________________________________
Multiple Choice Questions
31. Gross profit on sales is calculated by subtracting A. sales returns and allowances from sales. B. cost of goods sold from net sales. C. ending inventory from the total merchandise available for sale. D. total expenses from sales.
32. An income statement that has one total for all revenues and one total for all expenses is known as a A. classified income statement. B. multiple-step income statement. C. single-step income statement. D. categorized income statement.
33. Which of the following statements is correct? A. The term single-step income statement is sometimes used to describe a classified income statement. B. If a business is to earn a net income, the gross profit on sales must be greater than operating expenses. C. Salaries of office employees would be grouped with the selling expenses in the Operating Expenses section of the income statement. D. All of the above statements are correct.
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Chapter 13 - Financial Statements and Closing Procedures
34. The beginning capital balance shown on a statement of owner's equity is $43,000. Net income for the period is $18,000. The owner withdrew $22,000 cash from the business and made no additional investments during the period. The owner's capital balance at the end of the period is A. $39,000. B. $47,000. C. $61,000. D. $83,000.
35. The beginning capital balance shown on a statement of owner's equity is $86,000. Net income for the period is $36,000. The owner withdrew $44,000 cash from the business and made no additional investments during the period. The owner's capital balance at the end of the period is A. $78,000. B. $94,000. C. $122,000. D. $166,000.
36. The beginning capital balance shown on a statement of owner's equity is $100,000. Net income for the period is $50,000. The owner withdrew $25,000 cash from the business and made no additional investments during the period. The owner's capital balance at the end of the period is A. $175,000. B. $150,000. C. $125,000. D. $100,000.
37. The balance of the owner's drawing account is A. listed in the Other Expenses section of the income statement. B. listed in the Current Assets section of the balance sheet. C. used in the calculation of ending capital on a statement of owner's equity. D. listed in the Operating Expenses section of the income statement.
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Chapter 13 - Financial Statements and Closing Procedures
38. Which of the following is not a current asset? A. Accounts Receivable B. Prepaid Insurance C. Merchandise Inventory D. Equipment
39. Prepaid expenses appear in the A. Operating Expenses section of the income statement. B. Other Expenses section of the income statement. C. Current Assets section of the balance sheet. D. Current Liabilities section of the balance sheet.
40. Which of the following statements is not correct? A. The gross profit percentage is calculated by dividing the gross profit for the year by the net sales for the year. B. The average inventory is calculated by adding the beginning inventory to the ending inventory and dividing the sum by 2. C. A current ratio of 3.5 to 1 means that a firm has $3.50 in current liabilities for every $1 of current assets. D. All of the above statements are correct.
41. Which of the following accounts is not closed? A. Purchases B. Rent Expense C. Sales D. Merchandise Inventory
42. Which of the following accounts is not closed? A. Accumulated Depreciation B. Depreciation Expense C. Interest Expense D. Sales
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Chapter 13 - Financial Statements and Closing Procedures
43. Which of the following accounts is not closed? A. Sales. B. Accounts Receivable. C. Depreciation Expense. D. Purchases.
44. Which of the following accounts is not closed? A. Capital. B. Depreciation Expense. C. Sales. D. Purchase Discounts.
45. Which of the following groups of accounts will have zero balances after the closing process is completed? A. Allowance for Doubtful Accounts and Uncollectible Accounts Expense B. Purchases and Purchases Returns and Allowances C. Merchandise Inventory and Sales D. Depreciation Expense and Accumulated Depreciation—Equipment
46. Which of the following accounts will appear on the postclosing trial balance? A. Miscellaneous Income B. Payroll Taxes Expense C. Medicare Tax Payable D. Sales
47. Which of the following accounts will appear on the postclosing trial balance? A. Capital B. Depreciation Expense C. Sales D. Payroll Tax Expense
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Chapter 13 - Financial Statements and Closing Procedures
48. Inventory turnover is calculated by A. adding beginning inventory to ending inventory and dividing by 2. B. dividing average inventory by cost of goods sold. C. dividing cost of goods sold by average inventory. D. dividing average inventory by the ending inventory.
49. The current ratio is calculated by A. dividing current assets by current liabilities. B. dividing current liabilities by current assets. C. dividing total assets by total current assets. D. dividing current assets by total assets.
50. Which of the following statements is not correct? A. The worksheet is the source of data for the general journal entries required to close the temporary accounts. B. In the closing process, the balance of the owner's drawing account is transferred to the debit side of the owner's capital account. C. In the closing process, the balance of the Purchases account is transferred to the Merchandise Inventory account. D. Closing the Revenue accounts is the first step in the closing process.
51. A reversing entry should not be made for an adjusting entry to record A. the accrued salaries. B. an accrued expense item that will involve future cash payments. C. an accrued income item that will involved future cash receipts. D. depreciation.
52. The entry to reverse the adjustment for accrued interest income consists of a debit to A. Interest Income and a credit to Income Summary. B. Interest Income and a credit to Interest Receivable. C. Interest Income and a credit to Interest Expense. D. Interest Receivable and a credit to Interest Income.
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Chapter 13 - Financial Statements and Closing Procedures
53. In the general journal, reversing entries are dated as of A. the last day of the old fiscal period. B. the first day of the new fiscal period. C. any day during the month of the new fiscal period. D. any time before the end of the fiscal period.
54. The entry to reverse the adjusting entry for accrued payroll taxes expense includes A. a debit to Payroll Taxes Expense. B. a debit to Employee Income Tax Payable. C. a credit to Social Security Tax Payable and a credit to Medicare Tax Payable. D. a debit to Social Security Tax Payable and a debit to Medicare Tax Payable.
55. A company reported gross profit of $85,000, total operating expenses of $40,000 and interest income of $2,500. What is the income from operations? A. $47,500 B. $42,500 C. $40,000 D. $45,000
56. For the current fiscal year, Purchases were $166,000, Purchase Returns and Allowances were $3,000 and Freight In was $12,000. If the beginning merchandise inventory was $110,000 and the ending merchandise inventory was $75,000, the Cost of Goods Sold is: A. $186,000 B. $116,000 C. $210,000 D. $216,000
57. Which of the following is not a selling expense? A. Advertising Expense B. Rent Expense C. Sales Salaries Expense D. Delivery Expense
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Chapter 13 - Financial Statements and Closing Procedures
58. Which of the following would not be classified as a Current Asset? A. Equipment B. Supplies C. Accounts Receivable D. Cash
59. Interest Expense is classified as a(n): A. Administrative Expense B. Selling Expense C. Other Income D. Other Expense
60. Which of the following is not a section on a Classified Balance Sheet? A. Current Assets B. Long-Term Liabilities C. Selling Expenses D. Plant and Equipment
61. Which of the following should be classified as a General and Administrative Expense on a Multi-Step Income Statement? A. Delivery Expense B. Sales Salaries Expense C. Insurance Expense D. Advertising Expense
62. Cost of Goods Sold is classified as a(n) A. Revenue account B. Asset account C. Expense account D. Owner's Equity account
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Chapter 13 - Financial Statements and Closing Procedures
63. At the end of the year Stan Still Stationery Store had the following balances: Sales $580,000; Sales Discounts $2,540; Sales Returns and Allowances $14,280; Sales Salaries Expense $60,000. The Net Sales for the year are: A. $565,720 B. $577,460 C. $563,180 D. $503,180
64. For the current fiscal year, Purchases were $245,000, Purchase Returns and Allowances were $8,600, Purchase Discounts were $2,200 and Freight In was $32,000. If the beginning merchandise inventory was $60,000 and the ending merchandise inventory was $75,000, the Cost of Goods Sold is: A. $266,200 B. $281,200 C. $272,800 D. $251,200
Short Answer Questions
65. A classified income statement showed net sales of $435,000, cost of goods sold of $188,000, and total operating expenses of $165,000 for the fiscal year ended June 30, 2013. 1. What was the gross profit on sales? 2. What was the net income from operations?
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Chapter 13 - Financial Statements and Closing Procedures
66. A classified income statement showed net sales of $870,000, cost of goods sold of $376,000, and total operating expenses of $330,000 for the fiscal year ended December 31, 2013. 1. What was the gross profit on sales? 2. What was the net income from operations?
67. A firm had merchandise inventory of $30,000 on January 1, 2013, and had purchases of $45,000, freight in of $600, purchases returns and allowances of $2,300, and purchases discounts of $1,000 during 2013. The firm had merchandise inventory of $27,000 on December 31, 2013. 1. What net delivered cost of purchases was shown for the year ended December 31, 2013, on the classified income statement? 2. What was the cost of goods sold?
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Chapter 13 - Financial Statements and Closing Procedures
68. A firm had merchandise inventory of $60,000 on January 1, 2014, and had purchases of $90,000, freight in of $1,200, purchases returns and allowances of $4,600, and purchases discounts of $2,000 during 2014. The firm had merchandise inventory of $54,000 on December 31, 2014. 1. What net delivered cost of purchases was shown for the year ended December 31, 2014, on the classified income statement? 2. What was the cost of goods sold?
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Chapter 13 - Financial Statements and Closing Procedures
69. The adjusted trial balance data given below is from the Morgan Company's worksheet for the year ended December 31, 2014. Prepare a classified income statement for the year ended December 31, 2014. The expense accounts numbered 611-615 represent selling expenses, and those numbered 621-631 represent general and administrative expenses.
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Chapter 13 - Financial Statements and Closing Procedures
70. The adjusted trial balance data given below is from the Hampton Company's worksheet for the year ended December 31, 2014. The firm had net income of $38,000 for the year. Prepare a statement of owner's equity for the year. No additional investments were made during the period.
71. The adjusted trial balance data given below is from the Bennett Company's worksheet for the year ended December 31, 2013. The firm had net income of $100,000 for the year. Prepare a statement of owner's equity for the year. No additional investments were made during the period.
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Chapter 13 - Financial Statements and Closing Procedures
72. The adjusted trial balance data given below is from the Saugatuck Craft's worksheet for the year ended December 31, 2013. The firm had a net loss of $30,000 for the year. Prepare a statement of owner's equity for the year. No additional investments were made during the period.
73. The owner of a firm had capital of $85,000 on January 1, 2013, and made withdrawals of $33,000 during 2013. The business earned a net income of $45,000 for the year. 1. What amount of capital was shown as of December 31, 2013, on the statement of owner's equity? 2. How much was the increase or decrease in capital for the year?
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Chapter 13 - Financial Statements and Closing Procedures
74. The owner of a firm had capital of $170,000 on January 1, 2014, and made withdrawals of $66,000 during 2014. The business earned a net income of $90,000 for the year. 1. What amount of capital was shown as of December 31, 2014, on the statement of owner's equity? 2. How much was the increase or decrease in capital for the year?
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Chapter 13 - Financial Statements and Closing Procedures
75. The adjusted trial balance data given below is from Cameron White Company's worksheet for the year ended December 31, 2013. The balance of the Notes Payable account consists of notes that are due within a year. The mortgage extends for more than a year. Prepare a classified balance sheet as of December 31, 2013. The ending capital for the period from the statement of owner's equity is $56,150.
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Chapter 13 - Financial Statements and Closing Procedures
76. Brianna Graham is the owner of a dress shop. The firm had a net loss of $9,000 for the year. What accounts are debited and credited to transfer the net loss to the owner's capital account during the closing process?
77. Teresa Davis is the owner of a convenience shop. The firm had a net income of $4,500 for the year. What accounts are debited and credited to transfer the net loss to the owner's capital account during the closing process?
78. Allyse Petry is the owner of a boutique. During the year she made withdrawals of cash totaling $25,000. What accounts are debited and credited to close the owner's drawing account?
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Chapter 13 - Financial Statements and Closing Procedures
79. Jeannine Coulson is the owner of a book store. During the year she made withdrawals of cash totaling $9,000. What accounts are debited and credited to close the owner's drawing account?
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Chapter 13 - Financial Statements and Closing Procedures
80. On December 31, 2013, the Income Statement section of the worksheet is shown below. The balance of Ally Logan's drawing account is $16,000. Record the necessary closing entries on page 9 of a general journal.
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Chapter 13 - Financial Statements and Closing Procedures
81. The data below concerns adjustments to be made at the Conner Company. Record the adjusting entries on page 12 of a general journal as of December 31, 2013. On the same page of the general journal, record the reversing entries as of January 1, 2014. Include descriptions. Adjustment data: (a) On October 1, 2013, the firm paid rent of $6,000 in advance for a 6-month period. (b) A total of $5,000 should be recorded as depreciation of equipment for 2013. (c) On December 31, 2013, the firm owed salaries of $4,000 that will not be paid until January 2014. (d) On December 31, 2013, the firm owed the employer's social security (6.2%) and Medicare (1.45%) taxes on all of the accrued salaries.
82. The data below concerns adjustments to be made at the Tyson Company. Record the adjusting entries on page 12 of a general journal as of December 31, 2013. On the same page of the general journal, record the reversing entries as of January 1, 2014. Include descriptions. Adjustment data: (a) On October 1, 2013, the firm paid rent of $18,000 in advance for a 6-month period. (b) A total of $15,000 should be recorded as depreciation of equipment for 2013. (c) On December 31, 2013, the firm owed salaries of $12,000 that will not be paid until January 2014. (d) On December 31, 2013, the firm owed the employer's social security (6.2%) and Medicare (1.45%) taxes on all of the accrued salaries.
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Chapter 13 - Financial Statements and Closing Procedures
83. A. Check all of the following accounts that would be classified as a current asset.
B. Check all of the following accounts that would be classified as a current liability.
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Chapter 13 - Financial Statements and Closing Procedures
Matching Questions
84. Match the accounting terms with the description by entering the proper number. 1. The amount of gross profit from each dollar of Single-step sales income statement ____ 2. A format by which revenues and expenses on the income statement, and assets and liabilities on the balance sheet, are divided into groups of similar accounts and a subtotal is given for each group Gross profit ____ 3. The ease with which an item can be converted into Classified cash financial statement ____ 4. A type of income statement on which several subtotals are computed before the net income is Multiple-step calculated income statement ____ 5. Property that will be used in the business for longer Gross profit than one year percentage ____ 6. The difference between net sales and the cost of Inventory goods sold turnover ____ 7. Debts that must be paid within one year Liquidity ____ 8. A type of income statement where only one computation is needed to determine the net income Plant and (total revenue - total expenses = net income) equipment ____ 9. A relationship between current assets and current liabilities that provides a measure of a firm's ability to Reversing pay its current debts entries ____ 10. Debts of a business that are due more than one year in the future Current ratio ____ 11. Journal entries made to reverse the effect of certain adjusting entries involving accrued income or accrued expenses to avoid problems in recording future payments or receipts of cash in a new accounting period Current assets ____ 12. Assets consisting of cash, items that normally will be converted into cash within one year, or items that Long-term will be used up within one year liabilities ____ 13. The number of times inventory is purchased and Current sold during the accounting period liabilities ____
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Chapter 13 - Financial Statements and Closing Procedures
Chapter 13 Financial Statements and Closing Procedures Answer Key
True / False Questions
1. The total of the operating expenses for the period is deducted from the gross profit on sales to determine the net income or net loss from operations. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Easy Topic: Preparing the Financial Statements
2. The balance of the Sales Returns and Allowances account is reported as a selling expense in Operating Expenses section of a multiple-step income statement. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Medium Topic: Preparing the Financial Statements
3. Interest on notes payable would be listed in the Other Income section of a classified income statement. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Medium Topic: Preparing the Financial Statements
13-26 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
4. If a firm experiences a net loss, this amount is placed in parentheses on the income statement. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Easy Topic: Preparing the Financial Statements
5. The statement of owner's equity is prepared before the balance sheet so that the beginning owner's equity balance is available for the balance sheet. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-02 Prepare a statement of owner's equity from the worksheet. Level: Easy Topic: Preparing the Financial Statements
6. Current assets provide the funds needed to pay bills and meet expenses. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 13-03 Prepare a classified balance sheet from the worksheet. Level: Easy Topic: Preparing the Financial Statements
7. Current assets are usually listed on a balance sheet in order of liquidity. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 13-03 Prepare a classified balance sheet from the worksheet. Level: Medium Topic: Preparing the Financial Statements
13-27 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
8. Adjusting entries in the general journal do not require detailed explanations since the information about the entries is listed on the worksheet. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-04 Journalize and post the adjusting entries. Level: Medium Topic: Completing the Accounting Cycle
9. After all adjusting entries are posted, the balances of the general ledger accounts should match the amounts shown in the Adjusted Trial Balance section of the worksheet. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-04 Journalize and post the adjusting entries. Level: Medium Topic: Completing the Accounting Cycle
10. If the Income Summary account has a credit balance after revenues, and expenses are closed, the firm had a net income for the fiscal period. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-05 Journalize and post the closing entries. Level: Easy Topic: Completing the Accounting Cycle
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Chapter 13 - Financial Statements and Closing Procedures
11. The Income Summary credit amount appearing in the Income Statement section of the worksheet is included in the combined entry to close the revenue and other accounts with credit balances. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-05 Journalize and post the closing entries. Level: Medium Topic: Completing the Accounting Cycle
12. When a firm experiences a net loss, the owner's capital is decreased. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 13-05 Journalize and post the closing entries. Level: Easy Topic: Completing the Accounting Cycle
13. At the end of the period, the balance of the Accounts Receivable account is closed to the Income Summary account. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-05 Journalize and post the closing entries. Level: Medium Topic: Completing the Accounting Cycle
14. The adjusting entry to record depreciation should be reversed at the start of a new fiscal period to make subsequent financial record keeping easier. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-07 Journalize and post reversing entries. Level: Medium Topic: Completing the Accounting Cycle
13-29 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
15. When prepaid expense items are initially recorded as assets, the end-of-period adjustments for these items should be reversed. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-07 Journalize and post reversing entries. Level: Medium Topic: Completing the Accounting Cycle
Fill in the Blank Questions
16. The difference between net sales and the cost of goods sold is called the ____________________ on sales. gross profit
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Learning Objective: 13-08 Define the accounting terms new to this chapter. Level: Easy Topic: Completing the Accounting Cycle Topic: Preparing the Financial Statements
17. When several subtotals and totals are computed before the net income is presented, the income statement is referred to as a ____________________ income statement. multiple-step
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Learning Objective: 13-08 Define the accounting terms new to this chapter. Level: Easy Topic: Completing the Accounting Cycle Topic: Preparing the Financial Statements
13-30 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
18. A net loss for the period and withdrawals by the owner cause a ____________________ in capital. decrease
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 13-02 Prepare a statement of owner's equity from the worksheet. Level: Easy Topic: Preparing the Financial Statements
19. Cash, items that will normally be converted to cash within one year, and items that will be used up within one year are called ____________________ assets. current
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 13-03 Prepare a classified balance sheet from the worksheet. Level: Easy Topic: Preparing the Financial Statements
20. On a classified balance sheet, Accounts Payable would appear in the ____________________ section. current liabilities
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-03 Prepare a classified balance sheet from the worksheet. Level: Easy Topic: Preparing the Financial Statements
21. The ____________________ of a building is the portion of the original cost that has not yet been depreciated. book value
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 13-03 Prepare a classified balance sheet from the worksheet. Level: Easy Topic: Preparing the Financial Statements
13-31 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
22. The balance sheet is arranged in a ____________________ format if assets and liabilities are divided into groups of similar accounts and a subtotal is given for each group. classified
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-03 Prepare a classified balance sheet from the worksheet. Learning Objective: 13-08 Define the accounting terms new to this chapter. Level: Medium Topic: Completing the Accounting Cycle Topic: Preparing the Financial Statements
23. Each balance appearing in the ____________________ section of the worksheet is closed into the Income Summary account. Income Statement
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-05 Journalize and post the closing entries. Level: Easy Topic: Completing the Accounting Cycle
24. After the ____________________ entries are posted, the Sales account will have a zero balance. closing
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-05 Journalize and post the closing entries. Level: Easy Topic: Completing the Accounting Cycle
13-32 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
25. A gross profit percentage of 45 percent means that for every $1 of net sales, gross profit amounts to ____________________. $0.45
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 13-06 Prepare a postclosing trial balance. Level: Easy Topic: Completing the Accounting Cycle
26. The inventory ____________________ represents the time period it takes from the purchase of the inventory until it is sold. turnover
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 13-06 Prepare a postclosing trial balance. Learning Objective: 13-08 Define the accounting terms new to this chapter. Level: Easy Topic: Completing the Accounting Cycle
27. Each reversing entry is the exact opposite of the related ____________________ entry. adjusting
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 13-07 Journalize and post reversing entries. Level: Easy Topic: Completing the Accounting Cycle
13-33 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
28. An adjusting entry was made for accrued salaries of $600 at the end of 2013. The adjusting entry was then reversed. To record the first payroll of 2014, which totaled $1,500, Salaries Expense should be debited for ____________________. $1,500
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 13-07 Journalize and post reversing entries. Level: Easy Topic: Completing the Accounting Cycle
29. The entry to reverse an adjustment for accrued interest expense includes a debit to ____________________. Interest Payable
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 13-07 Journalize and post reversing entries. Level: Easy Topic: Completing the Accounting Cycle
30. If ____________________ entries are recorded, there is no need to examine each transaction in the new fiscal period to see whether a portion applies to a past period and then divide the amount of the transaction between the two periods. reversing
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 13-07 Journalize and post reversing entries. Level: Easy Topic: Completing the Accounting Cycle
13-34 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
Multiple Choice Questions
31. Gross profit on sales is calculated by subtracting A. sales returns and allowances from sales. B. cost of goods sold from net sales. C. ending inventory from the total merchandise available for sale. D. total expenses from sales.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Medium Topic: Preparing the Financial Statements
32. An income statement that has one total for all revenues and one total for all expenses is known as a A. classified income statement. B. multiple-step income statement. C. single-step income statement. D. categorized income statement.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Easy Topic: Preparing the Financial Statements
13-35 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
33. Which of the following statements is correct? A. The term single-step income statement is sometimes used to describe a classified income statement. B. If a business is to earn a net income, the gross profit on sales must be greater than operating expenses. C. Salaries of office employees would be grouped with the selling expenses in the Operating Expenses section of the income statement. D. All of the above statements are correct.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Medium Topic: Preparing the Financial Statements
34. The beginning capital balance shown on a statement of owner's equity is $43,000. Net income for the period is $18,000. The owner withdrew $22,000 cash from the business and made no additional investments during the period. The owner's capital balance at the end of the period is A. $39,000. B. $47,000. C. $61,000. D. $83,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 13-02 Prepare a statement of owner's equity from the worksheet. Level: Easy Topic: Preparing the Financial Statements
13-36 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
35. The beginning capital balance shown on a statement of owner's equity is $86,000. Net income for the period is $36,000. The owner withdrew $44,000 cash from the business and made no additional investments during the period. The owner's capital balance at the end of the period is A. $78,000. B. $94,000. C. $122,000. D. $166,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 13-02 Prepare a statement of owner's equity from the worksheet. Level: Easy Topic: Preparing the Financial Statements
36. The beginning capital balance shown on a statement of owner's equity is $100,000. Net income for the period is $50,000. The owner withdrew $25,000 cash from the business and made no additional investments during the period. The owner's capital balance at the end of the period is A. $175,000. B. $150,000. C. $125,000. D. $100,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 13-02 Prepare a statement of owner's equity from the worksheet. Level: Easy Topic: Preparing the Financial Statements
13-37 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
37. The balance of the owner's drawing account is A. listed in the Other Expenses section of the income statement. B. listed in the Current Assets section of the balance sheet. C. used in the calculation of ending capital on a statement of owner's equity. D. listed in the Operating Expenses section of the income statement.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-02 Prepare a statement of owner's equity from the worksheet. Level: Medium Topic: Preparing the Financial Statements
38. Which of the following is not a current asset? A. Accounts Receivable B. Prepaid Insurance C. Merchandise Inventory D. Equipment
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 13-03 Prepare a classified balance sheet from the worksheet. Level: Easy Topic: Preparing the Financial Statements
13-38 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
39. Prepaid expenses appear in the A. Operating Expenses section of the income statement. B. Other Expenses section of the income statement. C. Current Assets section of the balance sheet. D. Current Liabilities section of the balance sheet.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-03 Prepare a classified balance sheet from the worksheet. Level: Easy Topic: Preparing the Financial Statements
40. Which of the following statements is not correct? A. The gross profit percentage is calculated by dividing the gross profit for the year by the net sales for the year. B. The average inventory is calculated by adding the beginning inventory to the ending inventory and dividing the sum by 2. C. A current ratio of 3.5 to 1 means that a firm has $3.50 in current liabilities for every $1 of current assets. D. All of the above statements are correct.
AACSB: Reflective Thinking AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 13-06 Prepare a postclosing trial balance. Level: Medium Topic: Completing the Accounting Cycle
41. Which of the following accounts is not closed? A. Purchases B. Rent Expense C. Sales D. Merchandise Inventory
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 13-05 Journalize and post the closing entries. Level: Easy Topic: Completing the Accounting Cycle
13-39 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
42. Which of the following accounts is not closed? A. Accumulated Depreciation B. Depreciation Expense C. Interest Expense D. Sales
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 13-05 Journalize and post the closing entries. Level: Easy Topic: Completing the Accounting Cycle
43. Which of the following accounts is not closed? A. Sales. B. Accounts Receivable. C. Depreciation Expense. D. Purchases.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 13-05 Journalize and post the closing entries. Level: Easy Topic: Completing the Accounting Cycle
44. Which of the following accounts is not closed? A. Capital. B. Depreciation Expense. C. Sales. D. Purchase Discounts.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 13-05 Journalize and post the closing entries. Level: Easy Topic: Completing the Accounting Cycle
13-40 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
45. Which of the following groups of accounts will have zero balances after the closing process is completed? A. Allowance for Doubtful Accounts and Uncollectible Accounts Expense B. Purchases and Purchases Returns and Allowances C. Merchandise Inventory and Sales D. Depreciation Expense and Accumulated Depreciation—Equipment
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 13-05 Journalize and post the closing entries. Level: Easy Topic: Completing the Accounting Cycle
46. Which of the following accounts will appear on the postclosing trial balance? A. Miscellaneous Income B. Payroll Taxes Expense C. Medicare Tax Payable D. Sales
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 13-06 Prepare a postclosing trial balance. Level: Easy Topic: Completing the Accounting Cycle
47. Which of the following accounts will appear on the postclosing trial balance? A. Capital B. Depreciation Expense C. Sales D. Payroll Tax Expense
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 13-06 Prepare a postclosing trial balance. Level: Easy Topic: Completing the Accounting Cycle
13-41 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
48. Inventory turnover is calculated by A. adding beginning inventory to ending inventory and dividing by 2. B. dividing average inventory by cost of goods sold. C. dividing cost of goods sold by average inventory. D. dividing average inventory by the ending inventory.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 13-06 Prepare a postclosing trial balance. Level: Easy Topic: Completing the Accounting Cycle
49. The current ratio is calculated by A. dividing current assets by current liabilities. B. dividing current liabilities by current assets. C. dividing total assets by total current assets. D. dividing current assets by total assets.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 13-06 Prepare a postclosing trial balance. Level: Easy Topic: Completing the Accounting Cycle
50. Which of the following statements is not correct? A. The worksheet is the source of data for the general journal entries required to close the temporary accounts. B. In the closing process, the balance of the owner's drawing account is transferred to the debit side of the owner's capital account. C. In the closing process, the balance of the Purchases account is transferred to the Merchandise Inventory account. D. Closing the Revenue accounts is the first step in the closing process.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 13-05 Journalize and post the closing entries. Level: Medium Topic: Completing the Accounting Cycle
13-42 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
51. A reversing entry should not be made for an adjusting entry to record A. the accrued salaries. B. an accrued expense item that will involve future cash payments. C. an accrued income item that will involved future cash receipts. D. depreciation.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 13-07 Journalize and post reversing entries. Level: Medium Topic: Completing the Accounting Cycle
52. The entry to reverse the adjustment for accrued interest income consists of a debit to A. Interest Income and a credit to Income Summary. B. Interest Income and a credit to Interest Receivable. C. Interest Income and a credit to Interest Expense. D. Interest Receivable and a credit to Interest Income.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 13-07 Journalize and post reversing entries. Level: Medium Topic: Completing the Accounting Cycle
53. In the general journal, reversing entries are dated as of A. the last day of the old fiscal period. B. the first day of the new fiscal period. C. any day during the month of the new fiscal period. D. any time before the end of the fiscal period.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 13-07 Journalize and post reversing entries. Level: Easy Topic: Completing the Accounting Cycle
13-43 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
54. The entry to reverse the adjusting entry for accrued payroll taxes expense includes A. a debit to Payroll Taxes Expense. B. a debit to Employee Income Tax Payable. C. a credit to Social Security Tax Payable and a credit to Medicare Tax Payable. D. a debit to Social Security Tax Payable and a debit to Medicare Tax Payable.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 13-07 Journalize and post reversing entries. Level: Medium Topic: Completing the Accounting Cycle
55. A company reported gross profit of $85,000, total operating expenses of $40,000 and interest income of $2,500. What is the income from operations? A. $47,500 B. $42,500 C. $40,000 D. $45,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Medium Topic: Preparing the Financial Statements
56. For the current fiscal year, Purchases were $166,000, Purchase Returns and Allowances were $3,000 and Freight In was $12,000. If the beginning merchandise inventory was $110,000 and the ending merchandise inventory was $75,000, the Cost of Goods Sold is: A. $186,000 B. $116,000 C. $210,000 D. $216,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Medium Topic: Preparing the Financial Statements
13-44 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
57. Which of the following is not a selling expense? A. Advertising Expense B. Rent Expense C. Sales Salaries Expense D. Delivery Expense
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Easy Topic: Preparing the Financial Statements
58. Which of the following would not be classified as a Current Asset? A. Equipment B. Supplies C. Accounts Receivable D. Cash
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 13-03 Prepare a classified balance sheet from the worksheet. Level: Easy Topic: Preparing the Financial Statements
59. Interest Expense is classified as a(n): A. Administrative Expense B. Selling Expense C. Other Income D. Other Expense
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Easy Topic: Preparing the Financial Statements
13-45 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
60. Which of the following is not a section on a Classified Balance Sheet? A. Current Assets B. Long-Term Liabilities C. Selling Expenses D. Plant and Equipment
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 13-03 Prepare a classified balance sheet from the worksheet. Level: Easy Topic: Preparing the Financial Statements
61. Which of the following should be classified as a General and Administrative Expense on a Multi-Step Income Statement? A. Delivery Expense B. Sales Salaries Expense C. Insurance Expense D. Advertising Expense
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Easy Topic: Preparing the Financial Statements
62. Cost of Goods Sold is classified as a(n) A. Revenue account B. Asset account C. Expense account D. Owner's Equity account
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Easy Topic: Preparing the Financial Statements
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Chapter 13 - Financial Statements and Closing Procedures
63. At the end of the year Stan Still Stationery Store had the following balances: Sales $580,000; Sales Discounts $2,540; Sales Returns and Allowances $14,280; Sales Salaries Expense $60,000. The Net Sales for the year are: A. $565,720 B. $577,460 C. $563,180 D. $503,180
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Medium Topic: Preparing the Financial Statements
64. For the current fiscal year, Purchases were $245,000, Purchase Returns and Allowances were $8,600, Purchase Discounts were $2,200 and Freight In was $32,000. If the beginning merchandise inventory was $60,000 and the ending merchandise inventory was $75,000, the Cost of Goods Sold is: A. $266,200 B. $281,200 C. $272,800 D. $251,200
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Medium Topic: Preparing the Financial Statements
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Chapter 13 - Financial Statements and Closing Procedures
Short Answer Questions
65. A classified income statement showed net sales of $435,000, cost of goods sold of $188,000, and total operating expenses of $165,000 for the fiscal year ended June 30, 2013. 1. What was the gross profit on sales? 2. What was the net income from operations? 1. $247,000; 2. $82,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Medium Topic: Preparing the Financial Statements
66. A classified income statement showed net sales of $870,000, cost of goods sold of $376,000, and total operating expenses of $330,000 for the fiscal year ended December 31, 2013. 1. What was the gross profit on sales? 2. What was the net income from operations? 1. $494,000; 2. $164,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Medium Topic: Preparing the Financial Statements
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Chapter 13 - Financial Statements and Closing Procedures
67. A firm had merchandise inventory of $30,000 on January 1, 2013, and had purchases of $45,000, freight in of $600, purchases returns and allowances of $2,300, and purchases discounts of $1,000 during 2013. The firm had merchandise inventory of $27,000 on December 31, 2013. 1. What net delivered cost of purchases was shown for the year ended December 31, 2013, on the classified income statement? 2. What was the cost of goods sold? 1. $42,300; 2. $45,300
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Medium Topic: Preparing the Financial Statements
68. A firm had merchandise inventory of $60,000 on January 1, 2014, and had purchases of $90,000, freight in of $1,200, purchases returns and allowances of $4,600, and purchases discounts of $2,000 during 2014. The firm had merchandise inventory of $54,000 on December 31, 2014. 1. What net delivered cost of purchases was shown for the year ended December 31, 2014, on the classified income statement? 2. What was the cost of goods sold? 1. $84,600; 2. $90,600
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Medium Topic: Preparing the Financial Statements
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Chapter 13 - Financial Statements and Closing Procedures
69. The adjusted trial balance data given below is from the Morgan Company's worksheet for the year ended December 31, 2014. Prepare a classified income statement for the year ended December 31, 2014. The expense accounts numbered 611-615 represent selling expenses, and those numbered 621-631 represent general and administrative expenses.
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Chapter 13 - Financial Statements and Closing Procedures
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Chapter 13 - Financial Statements and Closing Procedures
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Level: Hard Topic: Preparing the Financial Statements
70. The adjusted trial balance data given below is from the Hampton Company's worksheet for the year ended December 31, 2014. The firm had net income of $38,000 for the year. Prepare a statement of owner's equity for the year. No additional investments were made during the period.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 13-02 Prepare a statement of owner's equity from the worksheet. Level: Medium Topic: Preparing the Financial Statements
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Chapter 13 - Financial Statements and Closing Procedures
71. The adjusted trial balance data given below is from the Bennett Company's worksheet for the year ended December 31, 2013. The firm had net income of $100,000 for the year. Prepare a statement of owner's equity for the year. No additional investments were made during the period.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 13-02 Prepare a statement of owner's equity from the worksheet. Level: Medium Topic: Preparing the Financial Statements
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Chapter 13 - Financial Statements and Closing Procedures
72. The adjusted trial balance data given below is from the Saugatuck Craft's worksheet for the year ended December 31, 2013. The firm had a net loss of $30,000 for the year. Prepare a statement of owner's equity for the year. No additional investments were made during the period.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 13-02 Prepare a statement of owner's equity from the worksheet. Level: Hard Topic: Preparing the Financial Statements
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Chapter 13 - Financial Statements and Closing Procedures
73. The owner of a firm had capital of $85,000 on January 1, 2013, and made withdrawals of $33,000 during 2013. The business earned a net income of $45,000 for the year. 1. What amount of capital was shown as of December 31, 2013, on the statement of owner's equity? 2. How much was the increase or decrease in capital for the year? 1. $97,000; 2. $12,000 increase
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 13-02 Prepare a statement of owner's equity from the worksheet. Level: Medium Topic: Preparing the Financial Statements
74. The owner of a firm had capital of $170,000 on January 1, 2014, and made withdrawals of $66,000 during 2014. The business earned a net income of $90,000 for the year. 1. What amount of capital was shown as of December 31, 2014, on the statement of owner's equity? 2. How much was the increase or decrease in capital for the year? 1. $194,000; 2. $24,000 increase
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 13-02 Prepare a statement of owner's equity from the worksheet. Level: Medium Topic: Preparing the Financial Statements
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Chapter 13 - Financial Statements and Closing Procedures
75. The adjusted trial balance data given below is from Cameron White Company's worksheet for the year ended December 31, 2013. The balance of the Notes Payable account consists of notes that are due within a year. The mortgage extends for more than a year. Prepare a classified balance sheet as of December 31, 2013. The ending capital for the period from the statement of owner's equity is $56,150.
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Chapter 13 - Financial Statements and Closing Procedures
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Chapter 13 - Financial Statements and Closing Procedures
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 13-03 Prepare a classified balance sheet from the worksheet. Level: Hard Topic: Preparing the Financial Statements
76. Brianna Graham is the owner of a dress shop. The firm had a net loss of $9,000 for the year. What accounts are debited and credited to transfer the net loss to the owner's capital account during the closing process? Debit Brianna Graham, Capital; credit Income Summary
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 13-05 Journalize and post the closing entries. Level: Medium Topic: Completing the Accounting Cycle
77. Teresa Davis is the owner of a convenience shop. The firm had a net income of $4,500 for the year. What accounts are debited and credited to transfer the net loss to the owner's capital account during the closing process? Debit Income Summary; credit Teresa Davis, Capital
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 13-05 Journalize and post the closing entries. Level: Medium Topic: Completing the Accounting Cycle
13-58 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
78. Allyse Petry is the owner of a boutique. During the year she made withdrawals of cash totaling $25,000. What accounts are debited and credited to close the owner's drawing account? Debit Allyse Petry, Capital; credit Allyse Petry, Drawing
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 13-05 Journalize and post the closing entries. Level: Easy Topic: Completing the Accounting Cycle
79. Jeannine Coulson is the owner of a book store. During the year she made withdrawals of cash totaling $9,000. What accounts are debited and credited to close the owner's drawing account? Debit Jeannine Coulson, Capital; credit Jeannine Coulson, Drawing
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 13-05 Journalize and post the closing entries. Level: Easy Topic: Completing the Accounting Cycle
13-59 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
80. On December 31, 2013, the Income Statement section of the worksheet is shown below. The balance of Ally Logan's drawing account is $16,000. Record the necessary closing entries on page 9 of a general journal.
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Chapter 13 - Financial Statements and Closing Procedures
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Chapter 13 - Financial Statements and Closing Procedures
AACSB: Analytic AICPA FN: Reporting Bloom's: Create Learning Objective: 13-05 Journalize and post the closing entries. Level: Hard Topic: Completing the Accounting Cycle
81. The data below concerns adjustments to be made at the Conner Company. Record the adjusting entries on page 12 of a general journal as of December 31, 2013. On the same page of the general journal, record the reversing entries as of January 1, 2014. Include descriptions. Adjustment data: (a) On October 1, 2013, the firm paid rent of $6,000 in advance for a 6-month period. (b) A total of $5,000 should be recorded as depreciation of equipment for 2013. (c) On December 31, 2013, the firm owed salaries of $4,000 that will not be paid until January 2014. (d) On December 31, 2013, the firm owed the employer's social security (6.2%) and Medicare (1.45%) taxes on all of the accrued salaries.
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Chapter 13 - Financial Statements and Closing Procedures
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Chapter 13 - Financial Statements and Closing Procedures
AACSB: Analytic AICPA FN: Reporting Bloom's: Create Learning Objective: 13-04 Journalize and post the adjusting entries. Learning Objective: 13-07 Journalize and post reversing entries. Level: Hard Topic: Completing the Accounting Cycle
82. The data below concerns adjustments to be made at the Tyson Company. Record the adjusting entries on page 12 of a general journal as of December 31, 2013. On the same page of the general journal, record the reversing entries as of January 1, 2014. Include descriptions. Adjustment data: (a) On October 1, 2013, the firm paid rent of $18,000 in advance for a 6-month period. (b) A total of $15,000 should be recorded as depreciation of equipment for 2013. (c) On December 31, 2013, the firm owed salaries of $12,000 that will not be paid until January 2014. (d) On December 31, 2013, the firm owed the employer's social security (6.2%) and Medicare (1.45%) taxes on all of the accrued salaries.
13-64 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
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Chapter 13 - Financial Statements and Closing Procedures
AACSB: Analytic AICPA FN: Reporting Bloom's: Create Learning Objective: 13-04 Journalize and post the adjusting entries. Learning Objective: 13-07 Journalize and post reversing entries. Level: Hard Topic: Completing the Accounting Cycle
83. A. Check all of the following accounts that would be classified as a current asset.
B. Check all of the following accounts that would be classified as a current liability.
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Chapter 13 - Financial Statements and Closing Procedures
A.
B.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 13-03 Prepare a classified balance sheet from the worksheet. Level: Medium Topic: Preparing the Financial Statements
13-67 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 13 - Financial Statements and Closing Procedures
Matching Questions
84. Match the accounting terms with the description by entering the proper number. Single-step 1. The amount of gross profit from each dollar of sales income statement 8 2. A format by which revenues and expenses on the income statement, and assets and liabilities on the balance sheet, are divided into groups of similar accounts and a subtotal is given for each group Gross profit 6 3. The ease with which an item can be converted into Classified cash financial statement 2 4. A type of income statement on which several subtotals Multiple-step are computed before the net income is calculated income statement 4 5. Property that will be used in the business for longer Gross profit than one year percentage 1 6. The difference between net sales and the cost of goods Inventory sold turnover 13 7. Debts that must be paid within one year Liquidity 3 8. A type of income statement where only one computation is needed to determine the net income (total Plant and revenue - total expenses = net income) equipment 5 9. A relationship between current assets and current liabilities that provides a measure of a firm's ability to pay its current debts Reversing entries 11 10. Debts of a business that are due more than one year in the future Current ratio 9 11. Journal entries made to reverse the effect of certain adjusting entries involving accrued income or accrued expenses to avoid problems in recording future payments or receipts of cash in a new accounting period Current assets 12 12. Assets consisting of cash, items that normally will be converted into cash within one year, or items that will be Long-term used up within one year liabilities 10 13. The number of times inventory is purchased and sold Current during the accounting period liabilities 7
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Chapter 13 - Financial Statements and Closing Procedures
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 13-01 Prepare a classified income statement from the worksheet. Learning Objective: 13-02 Prepare a statement of owner's equity from the worksheet. Learning Objective: 13-03 Prepare a classified balance sheet from the worksheet. Learning Objective: 13-04 Journalize and post the adjusting entries. Learning Objective: 13-05 Journalize and post the closing entries. Learning Objective: 13-06 Prepare a postclosing trial balance. Learning Objective: 13-07 Journalize and post reversing entries. Learning Objective: 13-08 Define the accounting terms new to this chapter. Level: Medium Topic: Completing the Accounting Cycle Topic: Preparing the Financial Statements
13-69 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
Chapter 14 Accounting Principles and Reporting Standards True / False Questions
1. The Financial Accounting Standards Board is an agency of the federal government. True False
2. Because financial statements must be objective and based on verifiable evidence, data obtained from estimates cannot be presented. True False
3. The concepts of objectivity and verifiability eliminate subjective decisions. True False
4. Most businesses follow the general rule that revenue is recognized when cash is received. True False
5. The concept of realization permits a company to recognize income whenever there is an increase in the market value of the assets it holds. True False
6. The separate entity assumption permits businesses to record property and equipment as assets that will provide benefits in future periods. True False
7. For convenience, accountants assume that the value of money is stable or that changes in its value are not great enough to affect the recorded financial data. True False
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Chapter 14 - Accounting Principles and Reporting Standards
8. If an expenditure that is expected to benefit future periods is made during one accounting period, the cost should be divided and charged as an expense during each period benefited. True False
9. Assets are recorded at cost when they are purchased, but the asset accounts are adjusted each year to reflect changes in market value. True False
10. The matching principle requires that all known costs be charged to the current period of operations. True False
11. Assets are carried on the books at historical cost. True False
12. The matching principle is being applied when the cost of equipment is depreciated over its useful life. True False
13. Accountants use footnotes to financial statements to disclose information that may influence investor decisions. True False
14. If too much of the cost of an asset is charged as depreciation expense in the present period, the firm's net income will be understated in later periods. True False
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Chapter 14 - Accounting Principles and Reporting Standards
15. A firm is following generally accepted accounting principles if it reports merchandise inventory on the balance sheet at its expected selling price. True False
Fill in the Blank Questions
16. The SEC has authority to define accounting terms and to prescribe accounting procedures used by all ____________________ held corporations. ________________________________________
17. Financial accounting rules affect the recording of data used to prepare financial reports that go to ____________________ and creditors. ________________________________________
18. Financial information is said to be ____________________ if it can be reviewed by accountants outside the company, and these accountants arrive at the same conclusions as the preparers of the firm's financial statements. ________________________________________
19. Revenue should not be recorded until it is ____________________ that is, until new assets are created in the form of money or claims against others. ________________________________________
20. The ____________________ assumption permits the costs of assets purchased many years ago to be added to the costs of newly purchased assets for financial statement reporting. ________________________________________
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Chapter 14 - Accounting Principles and Reporting Standards
21. The ____________________ assumption, which assumes that a firm will continue to operate indefinitely, permits carrying forward a portion of the cost of assets that will be used in future periods. ________________________________________
22. An accountant generally assumes that a firm is a(n) ____________________ and will continue to operate indefinitely. ________________________________________
23. If an important fact that would have an effect on an investor's decisions is omitted from the financial statements, the ____________________ principle has been violated. ________________________________________
24. The accountant records an expense for wages earned by employees during the last four days of the year, even though the wages will not be paid in that year. The accountant is following the ____________________ principle. ________________________________________
25. The ____________________ principle requires that if income is to be properly measured, all expired costs associated with the earning of revenue must be deducted from the revenue in the same accounting period. ________________________________________
26. If the ____________________ basis of accounting is used, income is recorded in the period in which it is earned. ________________________________________
27. The ____________________ basis of accounting means that business transactions are recorded based on an "arm's length" transaction in the market. ________________________________________
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Chapter 14 - Accounting Principles and Reporting Standards
28. The modifying convention of ____________________ concerns the significance of an item in relation to the particular situation of which it is a part. ________________________________________
29. Because of the modifying convention of ____________________, assets are understated rather than overstated if any uncertainty exists. ________________________________________
30. Lack of ____________________ would result in financial reports that are not comparable with earlier statements. ________________________________________
Multiple Choice Questions
31. In order to ensure that they are meaningful and useful, financial statements should be prepared A. in accordance with section 108 of the Sarbanes-Oxley Act. B. on a daily basis. C. on a timely basis. D. using generally accepted accounting principles (GAAP).
32. Which of the following statements is not correct? A. The Securities and Exchange Commission (SEC) issues the Statements of Financial Accounting Standards. B. Statements issued by the Financial Accounting Standards Board (FASB) are binding on the members of the American Institute of Certified Public Accountants (AICPA). C. An act of law gave the SEC the authority to determine the form and content of accounting reports filed by companies under its jurisdiction. D. The Financial Accounting Standards Board is an independent organization.
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Chapter 14 - Accounting Principles and Reporting Standards
33. The Statements of Financial Accounting Standards that automatically become generally accepted accounting principles are issued by A. the IRS. B. the SEC. C. the FASB. D. the AICPA.
34. The Financial Accounting Standards Board is A. a branch of the AICPA. B. a branch of the IRS. C. an independent organization. D. a branch of the SEC.
35. Which of the following important types of documents are not issued by the Accounting Standards Executive Committee? A. Accounting and auditing guides. B. Statements of position. C. Practice bulletins. D. Tax authority guidelines.
36. In its conceptual framework, the FASB concluded that financial reporting rules should concentrate on providing information that is helpful to A. Current and potential investors and creditors in making investment and credit decisions. B. Company management and owners. C. Tax Authorities. D. Regulating Agencies.
37. Investors and creditors expect to receive a cash flow from the business entity A. directly from the distribution of the company's earnings. B. indirectly through the disposition of their interests for cash. C. Both of the above. D. Neither of the above.
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Chapter 14 - Accounting Principles and Reporting Standards
38. Financial report users need information about A. profits. B. economic resources (assets). C. claims against the assets (liabilities and owner's equity). D. All of the above.
39. The SEC's 2003 report to the Congress on "principles-based" accounting observed that the first characteristic of objectives-based standards, as dictated by the Sarbanes-Oxley Act, is that any standard must be based on A. the cost-benefit test. B. an improved and consistently applied framework. C. qualitative characteristics. D. transparency.
40. Accounting information that is capable of making a difference in a decision by the user of the report is A. comparable. B. reliable. C. relevant. D. neutral.
41. The Cervantes Company uses the same method of depreciation for its equipment in each fiscal period. This practice is an example of A. conservatism. B. consistency. C. materiality. D. matching.
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Chapter 14 - Accounting Principles and Reporting Standards
42. The four assumptions financial statement users should be able to assume that preparers of the statements have made in preparing the statements that are listed by the FASB's conceptual framework are A. separate economic entity, going concern, monetary unit, and periodicity of income. B. conservatism, matching principle, revenue recognition principle, and periodicity of income. C. conservatism, cost-benefit test, full disclosure principal, and industry practice constraint. D. historical cost basis, materiality realization, and transparency.
43. Which of the following statements is correct? A. Under the accrual basis of accounting, revenue is recorded in the period in which it is earned. B. Under the accrual basis of accounting, expenses are recorded in the period in which they are incurred. C. Both of the above statements are correct. D. Neither of the above statements is correct.
44. Each year there was an increase in the market value of some stock owned by the Mudstream Company, but the accountant did not record the increase in asset value and equity until the stock was sold. In this situation, the accountant A. followed the matching principle. B. followed the realization principle. C. violated the accrual principle. D. violated the matching principle.
45. Keeping the personal assets of the owner of a business separate from the assets of the firm is an example of A. following the going concern assumption. B. applying the realization principle. C. following the separate entity assumption. D. applying the conservatism convention.
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Chapter 14 - Accounting Principles and Reporting Standards
46. When Tamar Snyder opened a shoe store, her accountant did not include the cash in her personal savings account as one of the assets of the business. This is an example of A. the separate entity assumption. B. the conservatism principle. C. the materiality principle. D. industry practice principle.
47. Which of the following is allowed under generally accepted accounting principles? A. A company was offered $60,000 for land that it had purchased for $15,000. The company did not sell the land but increased the Land account to $60,000. B. An owner lists the full cost of his or her personal automobile, which is occasionally used for business purposes, on the company's balance sheet. C. A large company recorded the $20 cost of a tool as an expense, although the item is expected to be used for 3 years. D. The Equipment account shows a balance of $55,000. This amount represents the original cost of $75,000 less the accumulated depreciation of $20,000.
48. Recording land at its cost rather than its appraisal value illustrates A. the full disclosure principle. B. the cost basis principle. C. the realization principle. D. the matching principle.
49. An accountant who records revenue when a credit sale is made rather than waiting for the receipt of cash from the customer is A. following the accrual principle. B. following the conservatism convention. C. violating generally accepted accounting principles. D. following the consistency principle.
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Chapter 14 - Accounting Principles and Reporting Standards
50. Depreciating equipment over its useful life is an example of A. following the objectivity assumption. B. applying the matching principle. C. applying the realization principle. D. applying the conservatism convention.
51. The financial statements in the annual report of a corporation contain footnotes explaining the methods used to depreciate the firm's equipment. This practice is an example of A. the consistency principle. B. the conservatism principle. C. the full disclosure principle. D. the accrual principle.
52. The Garrison Company offers terms of net 30 days for its credit sales. It records the revenue from these sales as soon as the sales are made rather than waiting until cash is received from the customers. This is an example of the A. realization principle. B. matching principle. C. conservatism principle. D. consistency principle.
53. A deviation from generally accepted accounting principles is A. permissible if the amount involved is material. B. permissible if the amount involved is immaterial. C. never allowed. D. permissible only if it's required in order to conform to the monetary unit assumption.
54. An accountant charged the Repairs Expense account for a tool that cost $12. The tool had an estimated useful life of 5 years; however, the accountant did not choose to depreciate it. The modifying convention that the accountant followed was A. materiality. B. objectivity. C. conservatism. D. industry practice.
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Chapter 14 - Accounting Principles and Reporting Standards
55. When a new company was formed, one partner contributed some used equipment he owned. The equipment was appraised at $44,000 and $50,000 by two different dealers. The accountant entered the equipment at $44,000 in the financial records of the partnership. This is an example of A. the materiality principle. B. the conservatism principle. C. the matching principle. D. industry practice principle.
56. Under the accrual basis of accounting A. Revenue is recorded in the period in which it is earned and expenses are recorded in the period in which incurred. B. Expenses are recorded in the period in which they are incurred and revenue is recorded when payment is received. C. Revenue and expenses are recorded when cash is received or paid. D. When revenues and expenses are recorded is up to the owners and/or managers.
57. Paige Turner Publishing receives cash from its subscribers in advance for a one year subscription. Under the revenue recognition principle, Paige Turner Publishing should recognize the revenue from the subscriptions A. at the time the cash is received. B. after the one year subscription has expired. C. in equal installments over the one year subscription period, as it is earned. D. in two equal installments, six months apart.
58. The Boston Red Sox receives cash from its season ticket holders in advance for the entire season. Under the revenue recognition principle, the Boston Red Sox should recognize the revenue from the season ticket holders A. at the time the cash is received. B. after the season is completed. C. as each game is played. D. in two equal installments, six months apart.
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Chapter 14 - Accounting Principles and Reporting Standards
59. Paige Turner Publishing paid cash in advance for a one year insurance policy. According to the matching principle, Paige Turner Publishing should recognize the policy as insurance expense A. at the time the cash is paid. B. after the one year policy has expired. C. in equal installments over the one year policy period, as the expense is incurred. D. in two equal installments, six months apart.
60. Hour Place Clock Repair paid $1,800 cash in advance for a one year insurance policy. According to the matching principle, if 4 months of the policy has expired by the balance sheet date, how much should Hour Place Clock Repair report as Prepaid Insurance? A. $0 B. $600 C. $1,200 D. $1,800
61. Hour Place Clock Repair paid $1,800 cash in advance for a one year insurance policy. According to the matching principle, if 4 months of the policy has expired by the end of the current fiscal year, how much should Hour Place Clock Repair report as Insurance Expense on the Income Statement? A. $0 B. $600 C. $1,200 D. $1,800
62. Hour Place Clock Repair paid $2,400 cash in advance for a six month advertising contract with the local newspaper. According to the matching principle, if 2 months of the contract has expired by the end of the current fiscal year, how much should Hour Place Clock Repair report as Advertising Expense on the Income Statement? A. $0 B. $400 C. $800 D. $2,400
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Chapter 14 - Accounting Principles and Reporting Standards
63. Paige Turner Publishing's employees worked the last 3 days of December 2013, that they will not be paid for until January 2014. According to the matching principle, Paige Turner Publishing should recognize the wages expense for the last 3 days of 2013 A. in 2013 when the employees worked. B. in 2014 when they were paid. C. half in 2013 and half in 2014. D. in whichever year the management wants to.
64. Holly Day Company purchased a piece of land 10 years ago for $50,000. Holly Day company is considering selling the land. The piece of land was recently appraised for $120,000, they received an offer from a prospective buyer for $105,000, and a similar piece of land 5 block away recently sold for $113,000. How much should Holly Day Company report on its balance sheet for the piece of land? A. $120,000 B. $50,000 C. $113,000 D. $105,000
65. Which of the following statements is NOT true? A. The American Institute of CPA's has in the past had strong influence on the development of accounting principles. B. The Sarbanes-Oxley Act places great emphasis on internal controls and fraud prevention. C. The SEC has authority to accept or reject financial accounting principles and standards developed by the FASB. D. Because of the Sarbanes-Oxley Act, it is probable that the FASB's conceptual framework will become less important in developing accounting principles and standards.
Short Answer Questions
66. What is meant by the concept of neutrality in accounting?
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Chapter 14 - Accounting Principles and Reporting Standards
67. In recent years, it has been reported that several large companies have manipulated business transactions and accounting records to change the net income reported on their income statements. Suggest five concepts, assumptions, principles, or conventions that such manipulation would violate.
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Chapter 14 - Accounting Principles and Reporting Standards
68. The income statement shown below was prepared and sent by Jenna Preston, the owner of Preston Gifts, to several of her creditors. The business is a sole proprietorship that sells miscellaneous gifts. An accountant for one of the creditors looked over the income statement and found that it did not conform to generally accepted accounting principles. Using the following additional information provided by the owner, prepare an income statement in accordance with generally accepted accounting principles.
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Chapter 14 - Accounting Principles and Reporting Standards
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Chapter 14 - Accounting Principles and Reporting Standards
69. The income statement shown below was prepared and sent by Curtis Brown, the owner of Curt's Crafts, to several of his creditors. The business is a sole proprietorship that sells crafts and toys. An accountant for one of the creditors looked over the income statement and found that it did not conform to generally accepted accounting principles. Using the following additional information provided by the owner, prepare an income statement in accordance with generally accepted accounting principles.
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Chapter 14 - Accounting Principles and Reporting Standards
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Chapter 14 - Accounting Principles and Reporting Standards
70. Carlos Verde owns a small nursery. He recently approached the local bank for a loan to finance an expansion of his nursery. Carlos prepared the balance sheet given below and submitted it with his loan application. The balance sheet does not conform to generally accepted accounting principles. Using the additional information provided by the owner, prepare a corrected balance sheet in accordance with generally accepted accounting principles.
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Chapter 14 - Accounting Principles and Reporting Standards
71. Antonio Hanley owns a small automobile service center. He recently approached the local bank for a loan to finance an expansion of his service center. Antonio prepared the balance sheet given below and submitted it with his loan application. The balance sheet does not conform to generally accepted accounting principles. Using the additional information provided by the owner, prepare a corrected balance sheet in accordance with generally accepted accounting principles.
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Chapter 14 - Accounting Principles and Reporting Standards
72. Indicate in each case whether the item has been handled in accordance with generally accepted accounting principles (GAAP). If so, indicate the key basic concept that has been followed. If not, indicate which concept has been violated and tell how the item should have been recorded or presented. 1. A piece of machinery has a book value (cost less accumulated depreciation) of $90,000. However, the machinery could not be sold for more than $70,000 today. The company's owner thinks that the machinery should nevertheless be reported on the balance sheet at $90,000 and depreciated over its useful life, because the equipment is being used regularly in the business and it is expected to be used for the next five years—the remaining useful life that is being used for depreciation purposes. 2. At the beginning of the year, the company bought a building for $1,000,000. At the end of the year, the building's value was appraised at $1,220,000. Since there was an increase in value, the company did not record depreciation on the building. 3. The assets listed in the accounting records of the company, which is operated as a sole proprietorship, include a savings account of the owner of the business. The owner established the savings account so that if she needs to invest more cash in the business, it will be readily available. 4. Three years ago, the company paid for a three-year insurance policy on its automobiles by writing a check for $6,000. At the end of the current year, the balance sheet of the company reported prepaid insurance at $6,000.
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Chapter 14 - Accounting Principles and Reporting Standards
73. Indicate in each case whether the item has been handled in accordance with generally accepted accounting principles (GAAP). If so, indicate the key basic concept that has been followed. If not, indicate which concept has been violated and tell how the item should have been recorded or presented. 1. White Farm Equipment Company manufactures tractors and combines. It pays its salespeople a commission of 15 percent of the sales price as their compensation. During the current year, the company's sales were $100,000,000 and commissions amounted to $15,000,000. In the income statement, sales are shown as $100,000,000, but the $15,000,000 in commissions was not recorded in the current year as it will not be paid until the next year. 2. Plato Plastics Molding uses a large quantity of small tools in its manufacturing process. The annual purchases of the tools, which have a life of about two years, are approximately 1 percent of the company's net income for the year. The company has followed the practice of capitalizing the cost of the tools and depreciating the cost over two years. The owner asks why the accountant spends so much time on "bookkeeping" and tells her to simply charge the tools to expense when they are purchased. The accountant agrees. 3. Lauren Fox owns a snow removal business in Maine. Customers who will be vacationing in Florida for the winter must make a deposit of one-half of the seasonal rate on September 1, the last date to make arrangements to have their sidewalks and driveways plowed throughout the winter while they are gone. The balance is due on November 1. At the time deposits are received, Fox records them as revenue. Refunds, if any, are treated as expenses at the time they are made. 4. The Dollar Store sells such items as discontinued products and merchandise purchased from bankrupt companies. Freight costs on goods purchased are quite high. The company adds the freight costs to the purchase price and treats the total as cost of its merchandise inventory. 5. Each year, Neuman Enterprises has a large number of uncollectible accounts. Neuman charges uncollectible accounts to expense when they are deemed to be uncollectible. On the average, an account is deemed to be uncollectible about 18 months after the due date of the account.
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Chapter 14 - Accounting Principles and Reporting Standards
74. Why is the cost principle dependent on the going concern assumption?
75. What two tests must be met in order for revenues to be recognized?
76. How are the concepts of materiality and cost-benefit related?
77. Define and give an example of all modifying constraints on accounting principles.
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Chapter 14 - Accounting Principles and Reporting Standards
78. The process used by FASB in developing conceptual framework statements reflects deductive reasoning and involves which steps?
79. Explain the following statement. "Investors and creditors expect to receive a cash flow directly or indirectly from the business entity."
80. According to FASB's conceptual framework, what are the 4 assumptions that financial statement users should assume that preparers of the statements have made in preparing the statements?
81. Define the two aspects of the monetary unit assumption.
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Chapter 14 - Accounting Principles and Reporting Standards
82. Why are notes important in financial statements and when should they be provided?
83. What is the general rule-of-thumb for determining if an item is material?
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Chapter 14 - Accounting Principles and Reporting Standards
Matching Questions
84. Match the accounting terms with the descriptions by entering the proper number. 1. If accounting concepts suggest a particular accounting treatment for an item but it appears that the theoretically correct treatment would require an unreasonable amount of work, the accountant may analyze the benefits and costs of the preferred treatment to see if the benefit gained from its adoption is justified by the cost Transparency ____ 2. If alternative treatments of items are of equal validity, the alternative resulting in lowest profit should Full disclosure be used principle ____ 3. The transparency notion is that information provided in the financial statements and the notes accompanying them should provide a clear and accurate picture of the financial affairs of the company. The key to this idea is Industry practice that of disclosure constraint ____ 4. The idea that economic activities of an entity can be divided logically and identified with specific time periods, such as the year or quarter Conservatism ____ 5. These are necessary characteristics that must be present in financial statements if they are to be Matching credible principle ____ 6. This is the concept that a business is separate from its owner or owners and the financial statements reflect the affairs of the business, not those of the owner Realization ____ 7. The concept that revenues and the costs incurred in Revenue earning those revenues should be recorded in the recognition appropriate accounting periods principle ____ 8. This is the governmental sector, represented in the accounting rulemaking process by the Securities and Monetary unit Exchange Commission assumption ____ 9. The principle that requires assets to be recorded at their cost at the time they are acquired and that, generally, long-term assets remain at historical costs in Qualitative the asset accounts characteristic ____ 10. In some cases where an accounting item is deemed Separate too small to affect a user's decisions, the "required" economic entity accounting may be ignored assumption ____ 11. The assumption that a business will continue to Conceptual operate indefinitely framework ____ 12. All information that might affect the user's interpretation of the profitability and financial condition of a business should be disclosed Public sector ____ 14-26 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
13. It is assumed that only those items and events that can be measured in monetary terms are included in the financial statements. An inherent part of this assumption is that the monetary unit is stable. Thus assets purchased one year may be combined in the accounts with those purchased in other years even though the dollars used in each year actually may have different purchasing power 14. With regards to revenue, it takes place only when cash, a financial claim, or other consideration is received for the sale of goods or services 15. The concept that information in financial statements cannot be selected or presented in a way to favor one set of interested parties over another 16. In a few limited cases the unusual operating characteristics of an industry, usually based on risk, special accounting principles, and procedures have been developed. These may not conform completely to GAAP for other industries 17. This is the nongovernmental sector of society. In an accounting context it is the business sector, represented in the accounting rule-making process by the Financial Accounting Standards Board 18. Revenue is recognized when it has been earned and realized 19. A basic framework developed by the FASB to provide conceptual guidelines for financial accounting and statements. The most important features are statements of qualitative features of statements, basic assumptions underlying statements, basic accounting principles, and modifying constraints
Materiality constraint ____
Cost-benefit test ____ Going concern assumption ____
Historical cost basis principle ____
Neutrality characteristic ____ Periodicity of income ____
Private sector ____
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Chapter 14 - Accounting Principles and Reporting Standards
85. Match the qualitative characteristics of accounting information with the descriptions. 1. This qualitative characteristic is indicated when independent measurers obtain similar results 2. Information that is presented soon enough after events are reported to be useful in decision making would meet this qualitative characteristic 3. Often referred to as objectivity; it is the idea that the financial statements are not prepared in a way to favor one group of users (management, owners, creditors, employees, etc.) over other groups 4. If information is relevant, it will have this qualitative characteristic and enable statement users in making predictions about the meaning and ultimate outcome of events giving rise to the information 5. If an entity uses the same accounting treatment for similar events and data from period to period, this qualitative characteristic is being met 6. This is the concept that data shown in the financial reports reflect what really happened 7. This qualitative characteristic means that accounting information is capable of making a difference in a decision by the report user 8. When the financial data is presented in such a manner that it can be meaningfully compared with the same data for other companies, it meets this qualitative characteristic 9. Information that helps the statement user confirm fulfillment or no fulfillment of prior expectations or decisions is said to have this qualitative characteristic 10. This qualitative characteristic means simply that the information should be dependable; such information is verifiable, is a faithful representation of the company's financial affairs, and is reasonably free of error and bias
Feedback value. ____
Reliability. ____
Relevance. ____
Consistency. ____
Predictive value. ____ Verifiability. ____
Timeliness. ____
Representational faithfulness. ____
Neutrality. ____
Comparability. ____
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Chapter 14 - Accounting Principles and Reporting Standards
Chapter 14 Accounting Principles and Reporting Standards Answer Key
True / False Questions
1. The Financial Accounting Standards Board is an agency of the federal government. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 14-02 Identify the major accounting standards-setting bodies and their roles in the standards-setting process. Level: Easy Topic: Generally Accepted Accounting Principles
2. Because financial statements must be objective and based on verifiable evidence, data obtained from estimates cannot be presented. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 14-04 Identify and explain the qualitative characteristics of accounting information. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
3. The concepts of objectivity and verifiability eliminate subjective decisions. FALSE
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 14-04 Identify and explain the qualitative characteristics of accounting information. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
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Chapter 14 - Accounting Principles and Reporting Standards
4. Most businesses follow the general rule that revenue is recognized when cash is received. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
5. The concept of realization permits a company to recognize income whenever there is an increase in the market value of the assets it holds. FALSE
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: Generally Accepted Accounting Principles
6. The separate entity assumption permits businesses to record property and equipment as assets that will provide benefits in future periods. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
7. For convenience, accountants assume that the value of money is stable or that changes in its value are not great enough to affect the recorded financial data. TRUE
AACSB: Reflective Thinking AICPA BB: Industry Bloom's: Remember Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
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Chapter 14 - Accounting Principles and Reporting Standards
8. If an expenditure that is expected to benefit future periods is made during one accounting period, the cost should be divided and charged as an expense during each period benefited. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
9. Assets are recorded at cost when they are purchased, but the asset accounts are adjusted each year to reflect changes in market value. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
10. The matching principle requires that all known costs be charged to the current period of operations. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
11. Assets are carried on the books at historical cost. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
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Chapter 14 - Accounting Principles and Reporting Standards
12. The matching principle is being applied when the cost of equipment is depreciated over its useful life. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
13. Accountants use footnotes to financial statements to disclose information that may influence investor decisions. TRUE
AACSB: Reflective Thinking AICPA BB: Industry Bloom's: Remember Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
14. If too much of the cost of an asset is charged as depreciation expense in the present period, the firm's net income will be understated in later periods. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
15. A firm is following generally accepted accounting principles if it reports merchandise inventory on the balance sheet at its expected selling price. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
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Chapter 14 - Accounting Principles and Reporting Standards
Fill in the Blank Questions
16. The SEC has authority to define accounting terms and to prescribe accounting procedures used by all ____________________ held corporations. publicly
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 14-02 Identify the major accounting standards-setting bodies and their roles in the standards-setting process. Level: Medium Topic: Generally Accepted Accounting Principles
17. Financial accounting rules affect the recording of data used to prepare financial reports that go to ____________________ and creditors. investors
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 14-03 Describe the users and uses of financial reports. Level: Easy Topic: Generally Accepted Accounting Principles
18. Financial information is said to be ____________________ if it can be reviewed by accountants outside the company, and these accountants arrive at the same conclusions as the preparers of the firm's financial statements. verifiable; objective
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 14-04 Identify and explain the qualitative characteristics of accounting information. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
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Chapter 14 - Accounting Principles and Reporting Standards
19. Revenue should not be recorded until it is ____________________ that is, until new assets are created in the form of money or claims against others. realized; earned
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
20. The ____________________ assumption permits the costs of assets purchased many years ago to be added to the costs of newly purchased assets for financial statement reporting. stable monetary unit
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
21. The ____________________ assumption, which assumes that a firm will continue to operate indefinitely, permits carrying forward a portion of the cost of assets that will be used in future periods. going concern
AACSB: Analytic AICPA FN: Measurement Bloom's: Analyze Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
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Chapter 14 - Accounting Principles and Reporting Standards
22. An accountant generally assumes that a firm is a(n) ____________________ and will continue to operate indefinitely. going concern
AACSB: Reflective Thinking AICPA BB: Industry Bloom's: Remember Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
23. If an important fact that would have an effect on an investor's decisions is omitted from the financial statements, the ____________________ principle has been violated. full disclosure
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
24. The accountant records an expense for wages earned by employees during the last four days of the year, even though the wages will not be paid in that year. The accountant is following the ____________________ principle. accrual; matching
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
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Chapter 14 - Accounting Principles and Reporting Standards
25. The ____________________ principle requires that if income is to be properly measured, all expired costs associated with the earning of revenue must be deducted from the revenue in the same accounting period. matching
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
26. If the ____________________ basis of accounting is used, income is recorded in the period in which it is earned. accrual
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
27. The ____________________ basis of accounting means that business transactions are recorded based on an "arm's length" transaction in the market. historical cost
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
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Chapter 14 - Accounting Principles and Reporting Standards
28. The modifying convention of ____________________ concerns the significance of an item in relation to the particular situation of which it is a part. materiality
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 14-07 Describe and apply the modifying constraints on accounting principles. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
29. Because of the modifying convention of ____________________, assets are understated rather than overstated if any uncertainty exists. conservatism
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 14-07 Describe and apply the modifying constraints on accounting principles. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
30. Lack of ____________________ would result in financial reports that are not comparable with earlier statements. consistency
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 14-04 Identify and explain the qualitative characteristics of accounting information. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
14-37 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
Multiple Choice Questions
31. In order to ensure that they are meaningful and useful, financial statements should be prepared A. in accordance with section 108 of the Sarbanes-Oxley Act. B. on a daily basis. C. on a timely basis. D. using generally accepted accounting principles (GAAP).
AACSB: Reflective Thinking AICPA BB: Legal Bloom's: Remember Learning Objective: 14-01 Understand the process used to develop generally accepted accounting principles. Level: Easy Topic: Generally Accepted Accounting Principles
32. Which of the following statements is not correct? A. The Securities and Exchange Commission (SEC) issues the Statements of Financial Accounting Standards. B. Statements issued by the Financial Accounting Standards Board (FASB) are binding on the members of the American Institute of Certified Public Accountants (AICPA). C. An act of law gave the SEC the authority to determine the form and content of accounting reports filed by companies under its jurisdiction. D. The Financial Accounting Standards Board is an independent organization.
AACSB: Reflective Thinking AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 14-01 Understand the process used to develop generally accepted accounting principles. Level: Easy Topic: Generally Accepted Accounting Principles
14-38 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
33. The Statements of Financial Accounting Standards that automatically become generally accepted accounting principles are issued by A. the IRS. B. the SEC. C. the FASB. D. the AICPA.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 14-02 Identify the major accounting standards-setting bodies and their roles in the standards-setting process. Level: Easy Topic: Generally Accepted Accounting Principles
34. The Financial Accounting Standards Board is A. a branch of the AICPA. B. a branch of the IRS. C. an independent organization. D. a branch of the SEC.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 14-02 Identify the major accounting standards-setting bodies and their roles in the standards-setting process. Level: Easy Topic: Generally Accepted Accounting Principles
35. Which of the following important types of documents are not issued by the Accounting Standards Executive Committee? A. Accounting and auditing guides. B. Statements of position. C. Practice bulletins. D. Tax authority guidelines.
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 14-02 Identify the major accounting standards-setting bodies and their roles in the standards-setting process. Level: Easy Topic: Generally Accepted Accounting Principles
14-39 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
36. In its conceptual framework, the FASB concluded that financial reporting rules should concentrate on providing information that is helpful to A. Current and potential investors and creditors in making investment and credit decisions. B. Company management and owners. C. Tax Authorities. D. Regulating Agencies.
AACSB: Analytic AICPA FN: Reporting Bloom's: Analyze Learning Objective: 14-03 Describe the users and uses of financial reports. Level: Easy Topic: Generally Accepted Accounting Principles
37. Investors and creditors expect to receive a cash flow from the business entity A. directly from the distribution of the company's earnings. B. indirectly through the disposition of their interests for cash. C. Both of the above. D. Neither of the above.
AACSB: Reflective Thinking AICPA BB: Industry Bloom's: Analyze Learning Objective: 14-03 Describe the users and uses of financial reports. Level: Easy Topic: Generally Accepted Accounting Principles
38. Financial report users need information about A. profits. B. economic resources (assets). C. claims against the assets (liabilities and owner's equity). D. All of the above.
AACSB: Reflective Thinking AICPA BB: Industry Bloom's: Analyze Learning Objective: 14-03 Describe the users and uses of financial reports. Level: Easy Topic: Generally Accepted Accounting Principles
14-40 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
39. The SEC's 2003 report to the Congress on "principles-based" accounting observed that the first characteristic of objectives-based standards, as dictated by the Sarbanes-Oxley Act, is that any standard must be based on A. the cost-benefit test. B. an improved and consistently applied framework. C. qualitative characteristics. D. transparency.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 14-03 Describe the users and uses of financial reports. Level: Easy Topic: Generally Accepted Accounting Principles
40. Accounting information that is capable of making a difference in a decision by the user of the report is A. comparable. B. reliable. C. relevant. D. neutral.
AACSB: Reflective Thinking AICPA FN: Measurement Bloom's: Analyze Learning Objective: 14-04 Identify and explain the qualitative characteristics of accounting information. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
41. The Cervantes Company uses the same method of depreciation for its equipment in each fiscal period. This practice is an example of A. conservatism. B. consistency. C. materiality. D. matching.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 14-04 Identify and explain the qualitative characteristics of accounting information. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
14-41 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
42. The four assumptions financial statement users should be able to assume that preparers of the statements have made in preparing the statements that are listed by the FASB's conceptual framework are A. separate economic entity, going concern, monetary unit, and periodicity of income. B. conservatism, matching principle, revenue recognition principle, and periodicity of income. C. conservatism, cost-benefit test, full disclosure principal, and industry practice constraint. D. historical cost basis, materiality realization, and transparency.
AACSB: Reflective Thinking AICPA FN: Reporting Bloom's: Remember Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Level: Hard Topic: The FASB's Conceptual Framework of Accounting
43. Which of the following statements is correct? A. Under the accrual basis of accounting, revenue is recorded in the period in which it is earned. B. Under the accrual basis of accounting, expenses are recorded in the period in which they are incurred. C. Both of the above statements are correct. D. Neither of the above statements is correct.
AACSB: Reflective Thinking AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
14-42 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
44. Each year there was an increase in the market value of some stock owned by the Mudstream Company, but the accountant did not record the increase in asset value and equity until the stock was sold. In this situation, the accountant A. followed the matching principle. B. followed the realization principle. C. violated the accrual principle. D. violated the matching principle.
AACSB: Reflective Thinking AICPA FN: Measurement Bloom's: Apply Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
45. Keeping the personal assets of the owner of a business separate from the assets of the firm is an example of A. following the going concern assumption. B. applying the realization principle. C. following the separate entity assumption. D. applying the conservatism convention.
AACSB: Reflective Thinking AICPA FN: Measurement Bloom's: Apply Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
14-43 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
46. When Tamar Snyder opened a shoe store, her accountant did not include the cash in her personal savings account as one of the assets of the business. This is an example of A. the separate entity assumption. B. the conservatism principle. C. the materiality principle. D. industry practice principle.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
47. Which of the following is allowed under generally accepted accounting principles? A. A company was offered $60,000 for land that it had purchased for $15,000. The company did not sell the land but increased the Land account to $60,000. B. An owner lists the full cost of his or her personal automobile, which is occasionally used for business purposes, on the company's balance sheet. C. A large company recorded the $20 cost of a tool as an expense, although the item is expected to be used for 3 years. D. The Equipment account shows a balance of $55,000. This amount represents the original cost of $75,000 less the accumulated depreciation of $20,000.
AACSB: Reflective Thinking AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
48. Recording land at its cost rather than its appraisal value illustrates A. the full disclosure principle. B. the cost basis principle. C. the realization principle. D. the matching principle.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
14-44 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
49. An accountant who records revenue when a credit sale is made rather than waiting for the receipt of cash from the customer is A. following the accrual principle. B. following the conservatism convention. C. violating generally accepted accounting principles. D. following the consistency principle.
AACSB: Reflective Thinking AICPA FN: Reporting Bloom's: Understand Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
50. Depreciating equipment over its useful life is an example of A. following the objectivity assumption. B. applying the matching principle. C. applying the realization principle. D. applying the conservatism convention.
AACSB: Analytic AICPA FN: Measurement Bloom's: Analyze Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
51. The financial statements in the annual report of a corporation contain footnotes explaining the methods used to depreciate the firm's equipment. This practice is an example of A. the consistency principle. B. the conservatism principle. C. the full disclosure principle. D. the accrual principle.
AACSB: Analytic AICPA FN: Measurement Bloom's: Analyze Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
14-45 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
52. The Garrison Company offers terms of net 30 days for its credit sales. It records the revenue from these sales as soon as the sales are made rather than waiting until cash is received from the customers. This is an example of the A. realization principle. B. matching principle. C. conservatism principle. D. consistency principle.
AACSB: Analytic AICPA FN: Measurement Bloom's: Analyze Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
53. A deviation from generally accepted accounting principles is A. permissible if the amount involved is material. B. permissible if the amount involved is immaterial. C. never allowed. D. permissible only if it's required in order to conform to the monetary unit assumption.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 14-07 Describe and apply the modifying constraints on accounting principles. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
54. An accountant charged the Repairs Expense account for a tool that cost $12. The tool had an estimated useful life of 5 years; however, the accountant did not choose to depreciate it. The modifying convention that the accountant followed was A. materiality. B. objectivity. C. conservatism. D. industry practice.
AACSB: Reflective Thinking AICPA FN: Measurement Bloom's: Apply Learning Objective: 14-07 Describe and apply the modifying constraints on accounting principles. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
14-46 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
55. When a new company was formed, one partner contributed some used equipment he owned. The equipment was appraised at $44,000 and $50,000 by two different dealers. The accountant entered the equipment at $44,000 in the financial records of the partnership. This is an example of A. the materiality principle. B. the conservatism principle. C. the matching principle. D. industry practice principle.
AACSB: Reflective Thinking AICPA FN: Measurement Bloom's: Apply Learning Objective: 14-07 Describe and apply the modifying constraints on accounting principles. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
56. Under the accrual basis of accounting A. Revenue is recorded in the period in which it is earned and expenses are recorded in the period in which incurred. B. Expenses are recorded in the period in which they are incurred and revenue is recorded when payment is received. C. Revenue and expenses are recorded when cash is received or paid. D. When revenues and expenses are recorded is up to the owners and/or managers.
AACSB: Reflective Thinking AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
14-47 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
57. Paige Turner Publishing receives cash from its subscribers in advance for a one year subscription. Under the revenue recognition principle, Paige Turner Publishing should recognize the revenue from the subscriptions A. at the time the cash is received. B. after the one year subscription has expired. C. in equal installments over the one year subscription period, as it is earned. D. in two equal installments, six months apart.
AACSB: Reflective Thinking AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
58. The Boston Red Sox receives cash from its season ticket holders in advance for the entire season. Under the revenue recognition principle, the Boston Red Sox should recognize the revenue from the season ticket holders A. at the time the cash is received. B. after the season is completed. C. as each game is played. D. in two equal installments, six months apart.
AACSB: Reflective Thinking AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
14-48 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
59. Paige Turner Publishing paid cash in advance for a one year insurance policy. According to the matching principle, Paige Turner Publishing should recognize the policy as insurance expense A. at the time the cash is paid. B. after the one year policy has expired. C. in equal installments over the one year policy period, as the expense is incurred. D. in two equal installments, six months apart.
AACSB: Reflective Thinking AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
60. Hour Place Clock Repair paid $1,800 cash in advance for a one year insurance policy. According to the matching principle, if 4 months of the policy has expired by the balance sheet date, how much should Hour Place Clock Repair report as Prepaid Insurance? A. $0 B. $600 C. $1,200 D. $1,800
AACSB: Reflective Thinking AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
14-49 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
61. Hour Place Clock Repair paid $1,800 cash in advance for a one year insurance policy. According to the matching principle, if 4 months of the policy has expired by the end of the current fiscal year, how much should Hour Place Clock Repair report as Insurance Expense on the Income Statement? A. $0 B. $600 C. $1,200 D. $1,800
AACSB: Reflective Thinking AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
62. Hour Place Clock Repair paid $2,400 cash in advance for a six month advertising contract with the local newspaper. According to the matching principle, if 2 months of the contract has expired by the end of the current fiscal year, how much should Hour Place Clock Repair report as Advertising Expense on the Income Statement? A. $0 B. $400 C. $800 D. $2,400
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
14-50 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
63. Paige Turner Publishing's employees worked the last 3 days of December 2013, that they will not be paid for until January 2014. According to the matching principle, Paige Turner Publishing should recognize the wages expense for the last 3 days of 2013 A. in 2013 when the employees worked. B. in 2014 when they were paid. C. half in 2013 and half in 2014. D. in whichever year the management wants to.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Easy Topic: The FASB's Conceptual Framework of Accounting
64. Holly Day Company purchased a piece of land 10 years ago for $50,000. Holly Day company is considering selling the land. The piece of land was recently appraised for $120,000, they received an offer from a prospective buyer for $105,000, and a similar piece of land 5 block away recently sold for $113,000. How much should Holly Day Company report on its balance sheet for the piece of land? A. $120,000 B. $50,000 C. $113,000 D. $105,000
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
14-51 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
65. Which of the following statements is NOT true? A. The American Institute of CPA's has in the past had strong influence on the development of accounting principles. B. The Sarbanes-Oxley Act places great emphasis on internal controls and fraud prevention. C. The SEC has authority to accept or reject financial accounting principles and standards developed by the FASB. D. Because of the Sarbanes-Oxley Act, it is probable that the FASB's conceptual framework will become less important in developing accounting principles and standards.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 14-02 Identify the major accounting standards-setting bodies and their roles in the standards-setting process. Level: Medium Topic: Generally Accepted Accounting Principles
Short Answer Questions
66. What is meant by the concept of neutrality in accounting? Neutrality means that the statements are prepared without bias and without attempting to portray a predetermined picture. The needs of all users are considered equally.
AACSB: Analytic AICPA BB: Industry Bloom's: Analyze Learning Objective: 14-04 Identify and explain the qualitative characteristics of accounting information. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
14-52 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
67. In recent years, it has been reported that several large companies have manipulated business transactions and accounting records to change the net income reported on their income statements. Suggest five concepts, assumptions, principles, or conventions that such manipulation would violate. Misstating net income on the income statement violates the neutrality, matching, revenue recognition, reliability, and comparability concepts.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 14-04 Identify and explain the qualitative characteristics of accounting information. Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Hard Topic: The FASB's Conceptual Framework of Accounting
14-53 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
68. The income statement shown below was prepared and sent by Jenna Preston, the owner of Preston Gifts, to several of her creditors. The business is a sole proprietorship that sells miscellaneous gifts. An accountant for one of the creditors looked over the income statement and found that it did not conform to generally accepted accounting principles. Using the following additional information provided by the owner, prepare an income statement in accordance with generally accepted accounting principles.
14-54 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
14-55 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Hard Topic: The FASB's Conceptual Framework of Accounting
69. The income statement shown below was prepared and sent by Curtis Brown, the owner of Curt's Crafts, to several of his creditors. The business is a sole proprietorship that sells crafts and toys. An accountant for one of the creditors looked over the income statement and found that it did not conform to generally accepted accounting principles. Using the following additional information provided by the owner, prepare an income statement in accordance with generally accepted accounting principles.
14-56 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
14-57 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Hard Topic: The FASB's Conceptual Framework of Accounting
70. Carlos Verde owns a small nursery. He recently approached the local bank for a loan to finance an expansion of his nursery. Carlos prepared the balance sheet given below and submitted it with his loan application. The balance sheet does not conform to generally accepted accounting principles. Using the additional information provided by the owner, prepare a corrected balance sheet in accordance with generally accepted accounting principles.
14-58 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
14-59 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Hard Topic: The FASB's Conceptual Framework of Accounting
71. Antonio Hanley owns a small automobile service center. He recently approached the local bank for a loan to finance an expansion of his service center. Antonio prepared the balance sheet given below and submitted it with his loan application. The balance sheet does not conform to generally accepted accounting principles. Using the additional information provided by the owner, prepare a corrected balance sheet in accordance with generally accepted accounting principles.
14-60 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
14-61 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Hard Topic: The FASB's Conceptual Framework of Accounting
72. Indicate in each case whether the item has been handled in accordance with generally accepted accounting principles (GAAP). If so, indicate the key basic concept that has been followed. If not, indicate which concept has been violated and tell how the item should have been recorded or presented. 1. A piece of machinery has a book value (cost less accumulated depreciation) of $90,000. However, the machinery could not be sold for more than $70,000 today. The company's owner thinks that the machinery should nevertheless be reported on the balance sheet at $90,000 and depreciated over its useful life, because the equipment is being used regularly in the business and it is expected to be used for the next five years—the remaining useful life that is being used for depreciation purposes. 2. At the beginning of the year, the company bought a building for $1,000,000. At the end of the year, the building's value was appraised at $1,220,000. Since there was an increase in value, the company did not record depreciation on the building. 3. The assets listed in the accounting records of the company, which is operated as a sole proprietorship, include a savings account of the owner of the business. The owner established the savings account so that if she needs to invest more cash in the business, it will be readily available. 4. Three years ago, the company paid for a three-year insurance policy on its automobiles by writing a check for $6,000. At the end of the current year, the balance sheet of the company reported prepaid insurance at $6,000. 1. Yes; cost basis and matching. 2. No; matching principle violated; Depreciation expense is recognized over the periods in which the asset is expected to help earn revenues for the business. 3. No; separate entity assumption violated; The owner's personal savings account should be separate from the business and not reported in the accounting records. 4. No; matching principle violated; They should have reported prepaid insurance at $6,000 three years ago when the policy was purchased.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 14-04 Identify and explain the qualitative characteristics of accounting information. Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Hard Topic: The FASB's Conceptual Framework of Accounting
14-62 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 14 - Accounting Principles and Reporting Standards
73. Indicate in each case whether the item has been handled in accordance with generally accepted accounting principles (GAAP). If so, indicate the key basic concept that has been followed. If not, indicate which concept has been violated and tell how the item should have been recorded or presented. 1. White Farm Equipment Company manufactures tractors and combines. It pays its salespeople a commission of 15 percent of the sales price as their compensation. During the current year, the company's sales were $100,000,000 and commissions amounted to $15,000,000. In the income statement, sales are shown as $100,000,000, but the $15,000,000 in commissions was not recorded in the current year as it will not be paid until the next year. 2. Plato Plastics Molding uses a large quantity of small tools in its manufacturing process. The annual purchases of the tools, which have a life of about two years, are approximately 1 percent of the company's net income for the year. The company has followed the practice of capitalizing the cost of the tools and depreciating the cost over two years. The owner asks why the accountant spends so much time on "bookkeeping" and tells her to simply charge the tools to expense when they are purchased. The accountant agrees. 3. Lauren Fox owns a snow removal business in Maine. Customers who will be vacationing in Florida for the winter must make a deposit of one-half of the seasonal rate on September 1, the last date to make arrangements to have their sidewalks and driveways plowed throughout the winter while they are gone. The balance is due on November 1. At the time deposits are received, Fox records them as revenue. Refunds, if any, are treated as expenses at the time they are made. 4. The Dollar Store sells such items as discontinued products and merchandise purchased from bankrupt companies. Freight costs on goods purchased are quite high. The company adds the freight costs to the purchase price and treats the total as cost of its merchandise inventory. 5. Each year, Neuman Enterprises has a large number of uncollectible accounts. Neuman charges uncollectible accounts to expense when they are deemed to be uncollectible. On the average, an account is deemed to be uncollectible about 18 months after the due date of the account. 1. No; revenue recognition principle and full disclosure concept violated; the sales are reported correctly, however, the company must also account for the payment of $15,000,000 in commissions as an expense. 2. Yes; materiality and cost-benefits constraints are not violated; the accountant's approach is conceptually correct, but materiality and cost-benefits constraints support the owner's instructions. 3. No; revenue recognition principle violated; the deposits should be treated as unearned revenue, not revenue since the service has not yet been provided. 4. No; matching concept violated; freight costs should be listed separately on the income statement. 5. No; matching principle violated; uncollectible accounts expense should be estimated and expensed in the same year as the sale that resulted in the receivable.
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Chapter 14 - Accounting Principles and Reporting Standards
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Learning Objective: 14-06 Explain and apply the basic principles of accounting. Learning Objective: 14-07 Describe and apply the modifying constraints on accounting principles. Level: Hard Topic: The FASB's Conceptual Framework of Accounting
74. Why is the cost principle dependent on the going concern assumption? Unless there is evidence to the contrary, it is assumed that a business will continue to operate indefinitely as a going concern. On the other hand, if evidence exists that a business will not be able to continue in existence as a going concern, the only useful information would be the value of the assets. Therefore, reporting the assets of a business that is not a going concern at cost would provide useless information. In such a case, the costs of assets are irrelevant, GAAP may be less important, and other factors such as the cost of applying GAAP may take precedence.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Hard Topic: The FASB's Conceptual Framework of Accounting
75. What two tests must be met in order for revenues to be recognized? Revenues must have been earned and they must have been realized before they can be recognized.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
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Chapter 14 - Accounting Principles and Reporting Standards
76. How are the concepts of materiality and cost-benefit related? If an item is immaterial, there is less justification for incurring substantial costs to comply with GAAP regarding the item. The cost of compliance may outweigh the benefits. If an item is highly material, then cost becomes less important.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 14-07 Describe and apply the modifying constraints on accounting principles. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
77. Define and give an example of all modifying constraints on accounting principles. A. Materiality; Materiality refers to the significance of an item of financial data in relation to other financial data; ABC Enterprise is a Fortune 500 company which purchased equipment for $1,000. The company decides to charge the cost to expense because the amount is insignificant in comparison to its net income. B. Cost-Benefit Test; Determines whether the cost of complying with an accounting principle or standard is justified by the benefit which would result if the preferred treatment is followed; An accountant spends more time accounting for each individual store fixture than she does accounting for all other aspects of the business. Since there are over 100 different types of fixtures and the cost is less than 1% of net income, the method of individually accounting for each fixture does not pass the cost benefit test. C. Conservatism; If there is no clear evidence of how a transaction should be accounted for, the accountant should choose the conservative approach; An accountant is unsure of the useful life of a new machine just purchased. The manufacturer estimates the life at 10 years. However, the Warehouse Manager believes the machine will last twice as long based on prior experience. In accordance with conservatism, the accountant should use the manufacturer's estimate. D. Industry Practice; Certain existing accounting practices within an industry which have become acceptable as GAAP; Public utility regulatory agencies allowed interest to be included in the cost of the plant rather than being charged to a separate interest expense account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 14-07 Describe and apply the modifying constraints on accounting principles. Level: Hard Topic: The FASB's Conceptual Framework of Accounting
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Chapter 14 - Accounting Principles and Reporting Standards
78. The process used by FASB in developing conceptual framework statements reflects deductive reasoning and involves which steps? 1. Define the goals and objectives of accounting. 2. Identify users of financial reports and the uses made of the reports. 3. Examine the qualitative characteristics that make accounting information useful. 4. Identify and define the financial elements such as assets, liabilities, revenues, and expenses. 5. Establish the form and content of financial statements. 6. Set forth fundamental recognition criteria. 7. Develop measurement standards for financial elements that appear in the financial statements.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 14-02 Identify the major accounting standards-setting bodies and their roles in the standards-setting process. Level: Medium Topic: Generally Accepted Accounting Principles
79. Explain the following statement. "Investors and creditors expect to receive a cash flow directly or indirectly from the business entity." Investors and creditors expect to receive a cash flow directly from the distribution of the company's earnings or indirectly through the disposition of the interests for cash.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 14-03 Describe the users and uses of financial reports. Level: Medium Topic: Generally Accepted Accounting Principles
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Chapter 14 - Accounting Principles and Reporting Standards
80. According to FASB's conceptual framework, what are the 4 assumptions that financial statement users should assume that preparers of the statements have made in preparing the statements? 1. Separate economic entity assumption 2. Going concern 3. Monetary unit 4. Periodicity of income
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
81. Define the two aspects of the monetary unit assumption. 1. Expressing financial facts and events are meaningful only when they can be expressed in monetary terms. 2. The value of money is stable.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Level: Medium Topic: The FASB's Conceptual Framework of Accounting
82. Why are notes important in financial statements and when should they be provided? 1. The notes provide integral and extended details for items shown in the financial statements. 2. Supplemental information may be required by FASB or SEC, or it may be voluntary.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 14-06 Explain and apply the basic principles of accounting. Level: Hard Topic: The FASB's Conceptual Framework of Accounting
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Chapter 14 - Accounting Principles and Reporting Standards
83. What is the general rule-of-thumb for determining if an item is material? If the item or total of items is less than 5% of net income it is considered immaterial.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 14-07 Describe and apply the modifying constraints on accounting principles. Level: Hard Topic: The FASB's Conceptual Framework of Accounting
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Chapter 14 - Accounting Principles and Reporting Standards
Matching Questions
84. Match the accounting terms with the descriptions by entering the proper number. 1. If accounting concepts suggest a particular accounting treatment for an item but it appears that the theoretically correct treatment would require an unreasonable amount of work, the accountant may analyze the benefits and costs of the preferred treatment to see if the benefit gained from its adoption is justified by the cost 2. If alternative treatments of items are of equal validity, the alternative resulting in lowest profit should be used 3. The transparency notion is that information provided in the financial statements and the notes accompanying them should provide a clear and accurate picture of the financial affairs of the company. The key to this idea is that of disclosure 4. The idea that economic activities of an entity can be divided logically and identified with specific time periods, such as the year or quarter 5. These are necessary characteristics that must be present in financial statements if they are to be credible 6. This is the concept that a business is separate from its owner or owners and the financial statements reflect the affairs of the business, not those of the owner 7. The concept that revenues and the costs incurred in earning those revenues should be recorded in the appropriate accounting periods 8. This is the governmental sector, represented in the accounting rulemaking process by the Securities and Exchange Commission 9. The principle that requires assets to be recorded at their cost at the time they are acquired and that, generally, long-term assets remain at historical costs in the asset accounts 10. In some cases where an accounting item is deemed too small to affect a user's decisions, the "required" accounting may be ignored 11. The assumption that a business will continue to operate indefinitely 12. All information that might affect the user's interpretation of the profitability and financial condition of a business should be disclosed
Transparency 3 Full disclosure principle 12
Industry practice constraint 16
Conservatism 2 Matching principle 7
Realization 14 Revenue recognition principle 18 Monetary unit assumption 13
Qualitative characteristic 5 Separate economic entity assumption 6 Conceptual framework 19
Public sector 8
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Chapter 14 - Accounting Principles and Reporting Standards
13. It is assumed that only those items and events that can be measured in monetary terms are included in the financial statements. An inherent part of this assumption is that the monetary unit is stable. Thus assets purchased one year may be combined in the accounts with those purchased in other years even though the dollars used in each year actually may have different purchasing power 14. With regards to revenue, it takes place only when cash, a financial claim, or other consideration is received for the sale of goods or services 15. The concept that information in financial statements cannot be selected or presented in a way to favor one set of interested parties over another 16. In a few limited cases the unusual operating characteristics of an industry, usually based on risk, special accounting principles, and procedures have been developed. These may not conform completely to GAAP for other industries 17. This is the nongovernmental sector of society. In an accounting context it is the business sector, represented in the accounting rule-making process by the Financial Accounting Standards Board 18. Revenue is recognized when it has been earned and realized 19. A basic framework developed by the FASB to provide conceptual guidelines for financial accounting and statements. The most important features are statements of qualitative features of statements, basic assumptions underlying statements, basic accounting principles, and modifying constraints
Materiality constraint 10
Cost-benefit test 1 Going concern assumption 11
Historical cost basis principle 9
Neutrality characteristic 15 Periodicity of income 4
Private sector 17
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 14-01 Understand the process used to develop generally accepted accounting principles. Learning Objective: 14-02 Identify the major accounting standards-setting bodies and their roles in the standards-setting process. Learning Objective: 14-03 Describe the users and uses of financial reports. Learning Objective: 14-04 Identify and explain the qualitative characteristics of accounting information. Learning Objective: 14-05 Describe and explain the basic assumptions about accounting reports. Learning Objective: 14-06 Explain and apply the basic principles of accounting. Learning Objective: 14-07 Describe and apply the modifying constraints on accounting principles. Learning Objective: 14-08 Define the accounting terms new to this chapter. Level: Hard Topic: Generally Accepted Accounting Principles Topic: The FASB's Conceptual Framework of Accounting
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Chapter 14 - Accounting Principles and Reporting Standards
85. Match the qualitative characteristics of accounting information with the descriptions. 1. This qualitative characteristic is indicated when independent measurers obtain similar results 2. Information that is presented soon enough after events are reported to be useful in decision making would meet this qualitative characteristic 3. Often referred to as objectivity; it is the idea that the financial statements are not prepared in a way to favor one group of users (management, owners, creditors, employees, etc.) over other groups 4. If information is relevant, it will have this qualitative characteristic and enable statement users in making predictions about the meaning and ultimate outcome of events giving rise to the information 5. If an entity uses the same accounting treatment for similar events and data from period to period, this qualitative characteristic is being met 6. This is the concept that data shown in the financial reports reflect what really happened 7. This qualitative characteristic means that accounting information is capable of making a difference in a decision by the report user 8. When the financial data is presented in such a manner that it can be meaningfully compared with the same data for other companies, it meets this qualitative characteristic 9. Information that helps the statement user confirm fulfillment or no fulfillment of prior expectations or decisions is said to have this qualitative characteristic 10. This qualitative characteristic means simply that the information should be dependable; such information is verifiable, is a faithful representation of the company's financial affairs, and is reasonably free of error and bias
Feedback value. 9
Reliability. 10
Relevance. 7
Consistency. 5
Predictive value. 4 Verifiability. 1
Timeliness. 2
Representational faithfulness. 6
Neutrality. 3
Comparability. 8
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 14-04 Identify and explain the qualitative characteristics of accounting information. Level: Hard Topic: The FASB's Conceptual Framework of Accounting
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
Chapter 15 Accounts Receivable and Uncollectible Accounts True / False Questions
1. When the estimate of the losses from uncollectible accounts is based on the aging method, the primary concern is proper valuation of the accounts receivable on the balance sheet. True False
2. The balance of Allowance for Doubtful Accounts is deducted from the balance of Accounts Receivable on the balance sheet. True False
3. When the allowance method of recognizing losses from uncollectible accounts is used, the net value of accounts receivable on the balance sheet will more nearly reflect the amount that will ultimately be collected. True False
4. The adjusting entry to record estimated losses from uncollectible accounts consists of a debit to Allowance for Doubtful Accounts. True False
5. If the estimate of loss from uncollectible accounts is based on sales, the existing balance in the Allowance for Doubtful Accounts account is added to the percentage of sales to determine the amount of the adjustment. True False
6. The experience of other firms in the same line of business may be used in estimating losses from uncollectible accounts for a new firm. True False
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
7. The allowance method may be used to record bad debt losses for income tax purposes. True False
8. Uncollectible Accounts Expense can be called Loss from Uncollectible Accounts. True False
9. Allowance for Doubtful Accounts is a liability account. True False
10. When losses from uncollectible accounts are provided for in advance, the entry to record the write-off of a particular customer's account includes a debit to Uncollectible Accounts Expense. True False
11. Allowance for Doubtful Accounts may, at times, have a debit balance. True False
12. The collection of an account previously written off is recorded in the cash receipts journal only. True False
13. When there is a partial collection of a balance previously written off, the reinstatement entry will be for the entire amount of the write-off. True False
14. Allowance for Doubtful Accounts may be used for the valuation of all types of receivables. True False
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
15. To achieve good internal control over accounts receivable, it is important to separate the recording of accounts receivable transactions and the collection of cash from customers. True False
Fill in the Blank Questions
16. The ____________________ principle is emphasized when the estimate of the loss from uncollectible accounts is based on sales. ________________________________________
17. The practice of estimating losses from uncollectible accounts before specific accounts become uncollectible is referred to as the ____________________ method. ________________________________________
18. The estimated loss from uncollectible accounts can be based on net credit sales or __________________. ________________________________________
19. The adjusting entry to record estimated losses from uncollectible accounts includes a(n) ____________________ to the Allowance for Doubtful Accounts account. ________________________________________
20. The longer an account is past due, the ____________________ likely it is to be collected. ________________________________________
21. The entry to record the write-off of a specific uncollectible account using the allowance method includes a ____________________ to Allowance for Doubtful Accounts. ________________________________________
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
22. After the adjusting entry is made to record the estimate of losses from uncollectible accounts, Allowance for Doubtful Accounts should have a(n) ____________________ balance. ________________________________________
23. A procedure that groups accounts receivable according to the length of time they have been outstanding is called ____________________ the accounts receivable. ________________________________________
24. Allowance for Doubtful Accounts is called a(n) ____________________ account because it literally reappraises the accounts receivable to reflect reasonable expectations. ________________________________________
25. The estimated loss from uncollectible accounts for the year will be __________________ if the firm has net sales of $400,000 for the year and bases its estimate of loss on 0.6 percent of net sales. ________________________________________
26. The estimated loss from uncollectible accounts for the first year of operations will be __________________ if the balance of Accounts Receivable is $60,000 and the firm bases its estimate of loss on 5 percent of accounts receivable. ________________________________________
27. The balance of the Accounts Receivable account is usually ____________________ when the direct charge-off method of recording losses from uncollectible accounts is used. ________________________________________
28. When an account that was written off is later collected, it takes _____________________ entries to record the transaction. ________________________________________
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
29. When an account that was written off is later collected, the entry to reverse the write-off is recorded as a ____________________ to Accounts Receivable and the customer's account. ________________________________________
30. The difference between the balance of the Accounts Receivable account and the balance of Allowance for Doubtful Accounts is the ____________________ value of accounts receivable. ________________________________________
Multiple Choice Questions
31. Which of the following statements is not correct? A. The use of the direct charge-off method of recording losses from uncollectible accounts usually results in the balance in the Accounts Receivable account being overstated. B. The direct charge-off method of recording losses from uncollectible accounts is the method required by Federal income tax laws. C. The direct charge-off method of recording losses from uncollectible accounts is an application of the matching principle. D. When using the direct charge-off method, there is no Allowance for Doubtful Accounts account.
32. Which of the following statements is not correct? A. The allowance method involves anticipating losses from uncollectible accounts by recognizing an expense for these losses before the actual accounts are written off. B. The adjusting entry to record the estimated loss from uncollectible accounts includes a credit to Accounts Receivable. C. Losses from uncollectible accounts can be estimated by analyzing sales or accounts receivable. D. The balance of Uncollectible Accounts Expense appears among the operating expenses on the income statement.
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
33. The adjusting entry to record estimated losses from uncollectible accounts consists of a debit to A. Uncollectible Accounts Expense and a credit to Accounts Receivable. B. Uncollectible Accounts Expense and a credit to Allowance for Doubtful Accounts. C. Allowance for Doubtful Accounts and a credit to Accounts Receivable. D. Accounts Receivable and a credit to Allowance for Doubtful Accounts.
34. The balance of the Allowance for Doubtful Accounts account is reported as A. a liability on the balance sheet. B. a deduction from Sales on the income statement. C. a deduction from Accounts Receivable on the balance sheet. D. an expense on the income statement.
35. The method of accounting for losses from uncollectible accounts that produces a proper valuation of the accounts receivable on the balance sheet is A. the allowance method based on aging the accounts receivable. B. the allowance method based on a percentage of net credit sales. C. the direct charge-off method. D. either the allowance method or the direct charge-off method.
36. The method that must be used to record bad debt losses for tax purposes is the A. allowance method based on a percent of net credit sales. B. allowance method based on an aging of accounts receivable. C. allowance method based on a percent of total accounts receivable outstanding. D. direct charge-off method.
37. An existing balance in Allowance for Doubtful Accounts is not considered when the estimate of loss is based on A. a percent of net credit sales. B. an aging Analyze of accounts receivable. C. a percent of total accounts receivable outstanding. D. a percent of net income.
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
38. A firm reported sales of $300,000 during the year and has a balance of $20,000 in its Accounts Receivable account at year-end. Prior to adjustment, Allowance for Doubtful Accounts has a credit balance of $300. The firm estimated its losses from uncollectible accounts to be one-half of 1 percent of sales. The entry to record the estimated losses from uncollectible accounts will include a credit to Allowance for Doubtful Accounts for A. $1,200. B. $1,500. C. $1,800. D. $3,000.
39. A firm reported sales of $600,000 during the year and has a balance of $40,000 in its Accounts Receivable account at year-end. Prior to adjustment, Allowance for Doubtful Accounts has a credit balance of $600. The firm estimated its losses from uncollectible accounts to be one-half of 1 percent of sales. The entry to record the estimated losses from uncollectible accounts will include a credit to Allowance for Doubtful Accounts for A. $6,000. B. $3,600. C. $3,000. D. $2,400.
40. A firm reported net credit sales of $225,000 during the year and has a balance of $20,000 in its Accounts Receivable account at year-end. Prior to adjustments, Allowance for Doubtful Accounts has a debit balance of $100. The firm estimates its losses from uncollectible accounts to be one-half of 1 percent of net credit sales. The entry to record the estimated losses from uncollectible accounts will include a credit to Allowance for Doubtful Accounts for A. $1,225. B. $1,125. C. $900. D. $2,250.
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
41. A firm reported net credit sales of $450,000 during the year and has a balance of $40,000 in its Accounts Receivable account at year-end. Prior to adjustments, Allowance for Doubtful Accounts has a debit balance of $200. The firm estimates its losses from uncollectible accounts to be one-half of 1 percent of net credit sales. The entry to record the estimated losses from uncollectible accounts will include a credit to Allowance for Doubtful Accounts for A. $4,500. B. $2,450. C. $2,250. D. $1,800.
42. On December 31, prior to adjustment, Allowance for Doubtful Accounts has a credit balance of $200. An aging Analyze of the accounts receivable produces an estimate of $1,000 of probable losses from uncollectible accounts. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $200. B. $800. C. $1,000. D. $1,200.
43. On December 31, prior to adjustment, Allowance for Doubtful Accounts has a credit balance of $400. An aging analysis of the accounts receivable produces an estimate of $2,000 of probable losses from uncollectible accounts. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $400. B. $1,600. C. $2,000. D. $2,400.
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
44. On December 31, prior to adjustment, Allowance for Doubtful Accounts has a debit balance of $400. An aging of the accounts receivable produces an estimate of $2,600 of probable losses from uncollectible accounts. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $2,200. B. $2,600. C. $3,000. D. $400.
45. On December 31, prior to adjustment, Allowance for Doubtful Accounts has a debit balance of $800. An aging of the accounts receivable produces an estimate of $5,200 of probable losses from uncollectible accounts. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $800. B. $4,400. C. $5,200. D. $6,000.
46. On December 31, prior to adjustments, the balance of Accounts Receivable is $16,000 and Allowance for Doubtful Accounts has a credit balance of $95. The firm estimates its losses from uncollectible accounts to be 5% of accounts receivable at the end of the year. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $705. B. $800. C. $895. D. $95.
47. On December 31, prior to adjustments, the balance of Accounts Receivable is $32,000 and Allowance for Doubtful Accounts has a credit balance of $190. The firm estimates its losses from uncollectible accounts to be 5% of accounts receivable at the end of the year. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $190. B. $1,410. C. $1,600. D. $1,790.
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
48. On December 31, prior to adjustments, the balance of Accounts Receivable is $26,000 and Allowance for Doubtful Accounts has a debit balance of $300. The firm estimates its losses from uncollectible accounts to be 5% of accounts receivable at the end of the year. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $1,000. B. $1,300. C. $1,600. D. $300.
49. On December 31, prior to adjustments, the balance of Accounts Receivable is $52,000 and Allowance for Doubtful Accounts has a debit balance of $600. The firm estimates its losses from uncollectible accounts to be 5% of accounts receivable at the end of the year. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $600. B. $2,000. C. $2,600. D. $3,200.
50. Allowance for Doubtful Accounts has a credit balance of $1,000 immediately before the write-off of a $300 account receivable. The credit balance of Allowance for Doubtful Accounts immediately after the write-off is A. $700. B. $1,000. C. $1,300. D. $300.
51. Allowance for Doubtful Accounts has a credit balance of $2,000 immediately before the write-off of a $600 account receivable. The balance of Allowance for Doubtful Accounts immediately after the write-off is A. $600 debit. B. $1,400 credit. C. $1,400 debit. D. $2,600 credit.
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
52. When the allowance method of recognizing losses from uncollectible accounts is used, the entry to record the write-off of a specific account consists of a debit to A. Uncollectible Accounts Expense and a credit to Accounts Receivable. B. Allowance for Doubtful Accounts and a credit to Accounts Receivable. C. Uncollectible Accounts Expense and a credit to Allowance for Doubtful Accounts. D. Accounts Receivable and a credit to Allowance for Doubtful Accounts.
53. A firm using the allowance method to provide for losses from uncollectible accounts collected the cash due from a customer whose account was previously written off. The entry to reinstate the customer's account included a credit to A. Sales. B. Accounts Receivable. C. Uncollectible Accounts Expense. D. Allowance for Doubtful Accounts.
54. When a firm uses the allowance method to provide for losses for uncollectible accounts, the collection of an account previously written off as uncollectible requires an entry to A. reinstate the account receivable. B. increase the balance of the Sales account. C. reduce the balance of Uncollectible Accounts Expense. D. decrease the balance of the Allowance for Doubtful Accounts.
55. Common internal controls for accounts receivable include: A. sending invoices and monthly statements. B. developing procedures that ensure that all credit sales are recorded and customers' accounts are debited. C. authorizing charge-off of accounts. D. all of the above are common internal controls for accounts receivable.
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
56. On December 31, 2014, prior to adjustments, Accounts Receivable has a debit balance of $356,000 and the Allowance for Doubtful Accounts has a credit balance of $1,200. The firm estimates its losses from uncollectible accounts to be 4% of accounts receivable at the end of the year. The amount of the adjusting entry needed to record the estimated losses from uncollectible accounts is A. $13,040 B. $14,240 C. $15,440 D. $17,800
57. On December 31, 2014, prior to adjustments, Accounts Receivable has a debit balance of $356,000 and the Allowance for Doubtful Accounts has a credit balance of $1,200. The firm estimates its losses from uncollectible accounts to be 4% of accounts receivable at the end of the year. The balance in the Allowance for Doubtful Accounts after the adjusting entry for the estimated losses from uncollectible accounts is A. $13,040 B. $14,240 C. $15,440 D. $17,800
58. On December 31, 2014, prior to adjustments, Accounts Receivable has a debit balance of $356,000 and the Allowance for Doubtful Accounts has a debit balance of $1,200. The firm estimates its losses from uncollectible accounts to be 4% of accounts receivable at the end of the year. The amount of the adjusting entry needed to record the estimated losses from uncollectible accounts is A. $13,040 B. $14,240 C. $15,440 D. $17,800
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
59. On December 31, 2013, prior to adjustments, Accounts Receivable has a debit balance of $370,000 and the Allowance for Doubtful Accounts has a credit balance of $400. The firm estimates its losses from uncollectible accounts to be 5% of accounts receivable at the end of the year. The amount of the adjusting entry needed to record the estimated losses from uncollectible accounts is A. $18,100 B. $18,500 C. $18,900 D. $17,800
60. Uncollectible Accounts Expense is classified as A. a Contra Asset on the Balance Sheet B. a Contra Expense on the Income Statement C. an Expense on the Income Statement D. a Liability on the Balance Sheet
61. On December 31, 2013, prior to adjustments, the Allowance for Doubtful Accounts has a debit balance of $750. An aging of the accounts receivable produces an estimate of $6,500 of probable losses from uncollectible accounts. The adjusting entry needed to record the estimated losses from uncollectible accounts includes a: A. a credit to Allowance for Doubtful Accounts for $6,500 B. a debit to Uncollectible Accounts Expense for $5,750 C. a credit to Allowance for Doubtful Accounts for $7,250 D. a debit to Uncollectible Accounts Expense for $6,500
62. On December 31, 2013, prior to adjustments, the Allowance for Doubtful Accounts has a debit balance of $750. An aging of the accounts receivable produces an estimate of $6,500 of probable losses from uncollectible accounts. The balance in the Allowance for Doubtful Accounts after the entry to record estimated losses from uncollectible accounts will be: A. a credit of $6,500 B. a credit of $5,750 C. a credit of $7,250 D. a debit of $6,500
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
63. Allowance for Doubtful Accounts has a debit balance of $500 at the end of the year, before adjustments. Sales for the year amounted to $870,000, sales discounts amounted to $30,000 and sales returns and allowances amounted to $40,000. If the uncollectible accounts expense is estimated at 2% of net sales, the amount of the adjusting entry to record the estimated losses from uncollectible accounts will be A. $17,400 B. $16,500 C. $16,000 D. $15,500
64. Allowance for Doubtful Accounts has a debit balance of $500 at the end of the year, before adjustments. Sales for the year amounted to $870,000, sales discounts amounted to $30,000 and sales returns and allowances amounted to $40,000. If the uncollectible accounts expense is estimated at 2% of net sales, the balance in the Allowance for Doubtful Accounts after the entry to record estimated losses from uncollectible accounts will be A. $17,400 B. $16,500 C. $16,000 D. $15,500
65. Allowance for Doubtful Accounts has a credit balance of $1,100 at the end of the year, before adjustments. Sales for the year amounted to $760,000, sales discounts amounted to $12,000 and sales returns and allowances amounted to $36,000. If the uncollectible accounts expense is estimated at 2% of net sales, the amount of the adjusting entry to record the estimated losses from uncollectible accounts will be A. $15,340 B. $13,140 C. $14,240 D. $15,200
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
Short Answer Questions
66. At the end of the current year, the trial balance of Kerry Hardware included the accounts and balances shown below. Credit sales were $7,000,000. Returns and allowances on these sales were $55,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.4 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for the current year? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts?
67. At the end of the current year, the trial balance of Diane's Dress Shop included the accounts and balances shown below. Credit sales were $9,200,000. Returns and allowances on these sales were $55,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.4 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for the current year? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts?
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
68. At the end of the current year, the trial balance of Monique's Fashion Industries included the accounts and balances shown below. Credit sales were $4,600,000. Returns and allowances on these sales were $27,500. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.3 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for the current year? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts? (Round your answers to the nearest dollar.)
69. At the end of the current year, the trial balance of Carlton's Auto Sales included the accounts and balances shown below. Credit sales were $9,200,000. Returns and allowances on these sales were $55,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.3 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for the current year? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts?
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
70. At the end of 2014, the trial balance of Bryant Paint Store included the accounts and balances shown below. Credit sales were $145,000. Returns and allowances on these sales were $2,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.3 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for 2014? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts for 2014?
71. At the end of the current year, the trial balance of Cary's Craft Shop included the accounts and balances shown below. Credit sales were $290,000. Returns and allowances on these sales were $4,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.3 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for the current year? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts?
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
72. At the end of the current year, the trial balance of Tracey's Consulting Services included the accounts and balances shown below. Credit sales were $90,000. Returns and allowances on these sales were $1,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.4 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for the current year? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts?
73. At the end of the current year, the trial balance of Daniels' Furniture Store included the accounts and balances shown below. Credit sales were $180,000. Returns and allowances on these sales were $2,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.4 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for the current year? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts?
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
74. At the end of the current year, the trial balance of Aaron's Kitchen Supply Corporation included the accounts and balances shown below. Credit sales were $4,600,000. Returns and allowances on these sales were $27,500. Assume that the firm bases its estimate of the loss from uncollectible accounts on 4 percent of accounts receivable.
1. What is the balance in the Allowance for Doubtful Accounts account after the adjusting entry for the estimated loss from uncollectible accounts is posted? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts?
75. At the end of the current year, the trial balance of Bianca's Exports included the accounts and balances shown below. Credit sales were $9,200,000. Returns and allowances on these sales were $55,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 4 percent of accounts receivable.
1. What is the balance in the Allowance for Doubtful Accounts account after the adjusting entry for the estimated loss from uncollectible accounts is posted? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts?
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
76. At the end of the current year, the trial balance of Kate's Cafe included the accounts and balances shown below. Credit sales were $90,000. Returns and allowances on these sales were $1,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 3 percent of accounts receivable.
1. What is the balance in the Allowance for Doubtful Accounts account after the adjusting entry for the estimated loss from uncollectible accounts is posted? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts?
77. At the end of the current year, the trial balance of Johannes' Sporting Goods Shop included the accounts and balances shown below. Credit sales were $180,000. Returns and allowances on these sales were $2,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 3 percent of accounts receivable.
1. What is the balance in the Allowance for Doubtful Accounts account after the adjusting entry for the estimated loss from uncollectible accounts is posted? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts?
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
78. The totals from the Savoy Company's Schedule of Accounts Receivable by Age as of the end of the current year are shown below.
As of the end of the current year, there is a debit balance of $75 in the Allowance for Doubtful Accounts. 1. Compute the estimated uncollectible accounts using the following rates.
2. Compute the amount of the adjusting entry for uncollectible accounts expense.
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
79. The totals from the Kalvin Company's Schedule of Accounts Receivable by Age as of the end of the current year are shown below.
As of the end of the current year, there is a debit balance of $75 in the Allowance for Doubtful Accounts. 1. Compute the estimated uncollectible accounts using the following rates.
2. Compute the amount of the adjustment for uncollectible accounts expense.
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
80. The Salinas Company uses the direct charge-off method to record uncollectible accounts. The following transactions occurred during 2013. Record the transactions on page 6 of a general journal, assuming the company also uses a Cash Receipts journal. Omit descriptions.
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
81. The Haven Company uses the allowance method to provide for losses from uncollectible accounts. Record the following selected transactions on page 3 of a general journal, assuming the company also uses a Cash Receipts journal. Omit descriptions.
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
82. The Travel-Right Company uses the allowance method to provide for losses from uncollectible accounts. Record the following selected transactions on page 5 of a general journal, assuming the company also uses a cash receipts journal. Omit descriptions.
83. Raymond Repair Services Company uses the direct charge-off method to record uncollectible accounts. On January 15, 2014, the company learned that Caroline Smith, a customer who owed $380, had moved and left no forwarding address. Raymond concluded that no part of the debt was collectible. Prepare the general journal entry to write off the account.
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
84. On April 22, 2014, Raymond Repair Services Company received a check for $220 from Caroline Smith, whose $380 account was written off on January 15. In the accompanying letter, Smith apologized and said she probably would be unable to pay any of the remaining balance. Prepare the general journal entry necessary. (Assume the firm uses the direct chargeoff method. Also assume that the entry in the cash receipts journal has already been made.)
Matching Questions
85. Match the accounting terms with the description by entering the proper number. 1. Any account whose balance is revalued or reappraised in light of reasonable expectations 2. A method of recording uncollectible accounts as they occur 3. Classifying accounts receivable balances according to how long they have been outstanding 4. A method of recording uncollectible accounts that estimates losses from uncollectible accounts and charges them to expense in the period when the sales are recorded
Valuation account ____ Allowance method ____ Direct chargeoff method ____ Aging the accounts receivable ____
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
Chapter 15 Accounts Receivable and Uncollectible Accounts Answer Key
True / False Questions
1. When the estimate of the losses from uncollectible accounts is based on the aging method, the primary concern is proper valuation of the accounts receivable on the balance sheet. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
2. The balance of Allowance for Doubtful Accounts is deducted from the balance of Accounts Receivable on the balance sheet. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
3. When the allowance method of recognizing losses from uncollectible accounts is used, the net value of accounts receivable on the balance sheet will more nearly reflect the amount that will ultimately be collected. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Easy Topic: The Allowance Method of Accounting for Uncollectible Accounts
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
4. The adjusting entry to record estimated losses from uncollectible accounts consists of a debit to Allowance for Doubtful Accounts. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
5. If the estimate of loss from uncollectible accounts is based on sales, the existing balance in the Allowance for Doubtful Accounts account is added to the percentage of sales to determine the amount of the adjustment. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
6. The experience of other firms in the same line of business may be used in estimating losses from uncollectible accounts for a new firm. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Easy Topic: The Allowance Method of Accounting for Uncollectible Accounts
7. The allowance method may be used to record bad debt losses for income tax purposes. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Easy Topic: The Allowance Method of Accounting for Uncollectible Accounts
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
8. Uncollectible Accounts Expense can be called Loss from Uncollectible Accounts. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Easy Topic: The Allowance Method of Accounting for Uncollectible Accounts
9. Allowance for Doubtful Accounts is a liability account. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
10. When losses from uncollectible accounts are provided for in advance, the entry to record the write-off of a particular customer's account includes a debit to Uncollectible Accounts Expense. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-02 Charge off uncollectible accounts using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
11. Allowance for Doubtful Accounts may, at times, have a debit balance. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
12. The collection of an account previously written off is recorded in the cash receipts journal only. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-03 Record the collection of accounts previously written off using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
13. When there is a partial collection of a balance previously written off, the reinstatement entry will be for the entire amount of the write-off. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-03 Record the collection of accounts previously written off using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
14. Allowance for Doubtful Accounts may be used for the valuation of all types of receivables. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-05 Record the collection of accounts previously written off using the direct charge-off method. Level: Easy Topic: Applying the Direct Charge-Off Method: Internal Control of Accounts Receivable
15. To achieve good internal control over accounts receivable, it is important to separate the recording of accounts receivable transactions and the collection of cash from customers. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-06 Recognize common internal controls for accounts receivable. Level: Medium Topic: Applying the Direct Charge-Off Method: Internal Control of Accounts Receivable
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
Fill in the Blank Questions
16. The ____________________ principle is emphasized when the estimate of the loss from uncollectible accounts is based on sales. matching
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
17. The practice of estimating losses from uncollectible accounts before specific accounts become uncollectible is referred to as the ____________________ method. allowance
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Easy Topic: The Allowance Method of Accounting for Uncollectible Accounts
18. The estimated loss from uncollectible accounts can be based on net credit sales or __________________. accounts receivable
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Easy Topic: The Allowance Method of Accounting for Uncollectible Accounts
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
19. The adjusting entry to record estimated losses from uncollectible accounts includes a(n) ____________________ to the Allowance for Doubtful Accounts account. credit
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Easy Topic: The Allowance Method of Accounting for Uncollectible Accounts
20. The longer an account is past due, the ____________________ likely it is to be collected. less
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Easy Topic: The Allowance Method of Accounting for Uncollectible Accounts
21. The entry to record the write-off of a specific uncollectible account using the allowance method includes a ____________________ to Allowance for Doubtful Accounts. debit
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Easy Topic: The Allowance Method of Accounting for Uncollectible Accounts
22. After the adjusting entry is made to record the estimate of losses from uncollectible accounts, Allowance for Doubtful Accounts should have a(n) ____________________ balance. credit
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Easy Topic: The Allowance Method of Accounting for Uncollectible Accounts
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
23. A procedure that groups accounts receivable according to the length of time they have been outstanding is called ____________________ the accounts receivable. aging
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Easy Topic: The Allowance Method of Accounting for Uncollectible Accounts
24. Allowance for Doubtful Accounts is called a(n) ____________________ account because it literally reappraises the accounts receivable to reflect reasonable expectations. valuation
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
25. The estimated loss from uncollectible accounts for the year will be __________________ if the firm has net sales of $400,000 for the year and bases its estimate of loss on 0.6 percent of net sales. $2,400
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
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Chapter 15 - Accounts Receivable and Uncollectible Accounts
26. The estimated loss from uncollectible accounts for the first year of operations will be __________________ if the balance of Accounts Receivable is $60,000 and the firm bases its estimate of loss on 5 percent of accounts receivable. $3,000
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
27. The balance of the Accounts Receivable account is usually ____________________ when the direct charge-off method of recording losses from uncollectible accounts is used. overstated
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
28. When an account that was written off is later collected, it takes _____________________ entries to record the transaction. two
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 15-03 Record the collection of accounts previously written off using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-34 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
29. When an account that was written off is later collected, the entry to reverse the write-off is recorded as a ____________________ to Accounts Receivable and the customer's account. debit
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-03 Record the collection of accounts previously written off using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
30. The difference between the balance of the Accounts Receivable account and the balance of Allowance for Doubtful Accounts is the ____________________ value of accounts receivable. net; book
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-04 Record losses from uncollectible accounts using the direct charge-off method. Level: Medium Topic: Applying the Direct Charge-Off Method: Internal Control of Accounts Receivable
Multiple Choice Questions
31. Which of the following statements is not correct? A. The use of the direct charge-off method of recording losses from uncollectible accounts usually results in the balance in the Accounts Receivable account being overstated. B. The direct charge-off method of recording losses from uncollectible accounts is the method required by Federal income tax laws. C. The direct charge-off method of recording losses from uncollectible accounts is an application of the matching principle. D. When using the direct charge-off method, there is no Allowance for Doubtful Accounts account.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-35 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
32. Which of the following statements is not correct? A. The allowance method involves anticipating losses from uncollectible accounts by recognizing an expense for these losses before the actual accounts are written off. B. The adjusting entry to record the estimated loss from uncollectible accounts includes a credit to Accounts Receivable. C. Losses from uncollectible accounts can be estimated by analyzing sales or accounts receivable. D. The balance of Uncollectible Accounts Expense appears among the operating expenses on the income statement.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
33. The adjusting entry to record estimated losses from uncollectible accounts consists of a debit to A. Uncollectible Accounts Expense and a credit to Accounts Receivable. B. Uncollectible Accounts Expense and a credit to Allowance for Doubtful Accounts. C. Allowance for Doubtful Accounts and a credit to Accounts Receivable. D. Accounts Receivable and a credit to Allowance for Doubtful Accounts.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Easy Topic: The Allowance Method of Accounting for Uncollectible Accounts
34. The balance of the Allowance for Doubtful Accounts account is reported as A. a liability on the balance sheet. B. a deduction from Sales on the income statement. C. a deduction from Accounts Receivable on the balance sheet. D. an expense on the income statement.
AACSB: Analytic AICPA FN: Reporting Bloom's: Analyze Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-36 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
35. The method of accounting for losses from uncollectible accounts that produces a proper valuation of the accounts receivable on the balance sheet is A. the allowance method based on aging the accounts receivable. B. the allowance method based on a percentage of net credit sales. C. the direct charge-off method. D. either the allowance method or the direct charge-off method.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Easy Topic: The Allowance Method of Accounting for Uncollectible Accounts
36. The method that must be used to record bad debt losses for tax purposes is the A. allowance method based on a percent of net credit sales. B. allowance method based on an aging of accounts receivable. C. allowance method based on a percent of total accounts receivable outstanding. D. direct charge-off method.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Easy Topic: The Allowance Method of Accounting for Uncollectible Accounts
37. An existing balance in Allowance for Doubtful Accounts is not considered when the estimate of loss is based on A. a percent of net credit sales. B. an aging Analyze of accounts receivable. C. a percent of total accounts receivable outstanding. D. a percent of net income.
AACSB: Analytic AICPA FN: Reporting Bloom's: Analyze Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-37 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
38. A firm reported sales of $300,000 during the year and has a balance of $20,000 in its Accounts Receivable account at year-end. Prior to adjustment, Allowance for Doubtful Accounts has a credit balance of $300. The firm estimated its losses from uncollectible accounts to be one-half of 1 percent of sales. The entry to record the estimated losses from uncollectible accounts will include a credit to Allowance for Doubtful Accounts for A. $1,200. B. $1,500. C. $1,800. D. $3,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
39. A firm reported sales of $600,000 during the year and has a balance of $40,000 in its Accounts Receivable account at year-end. Prior to adjustment, Allowance for Doubtful Accounts has a credit balance of $600. The firm estimated its losses from uncollectible accounts to be one-half of 1 percent of sales. The entry to record the estimated losses from uncollectible accounts will include a credit to Allowance for Doubtful Accounts for A. $6,000. B. $3,600. C. $3,000. D. $2,400.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-38 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
40. A firm reported net credit sales of $225,000 during the year and has a balance of $20,000 in its Accounts Receivable account at year-end. Prior to adjustments, Allowance for Doubtful Accounts has a debit balance of $100. The firm estimates its losses from uncollectible accounts to be one-half of 1 percent of net credit sales. The entry to record the estimated losses from uncollectible accounts will include a credit to Allowance for Doubtful Accounts for A. $1,225. B. $1,125. C. $900. D. $2,250.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Hard Topic: The Allowance Method of Accounting for Uncollectible Accounts
41. A firm reported net credit sales of $450,000 during the year and has a balance of $40,000 in its Accounts Receivable account at year-end. Prior to adjustments, Allowance for Doubtful Accounts has a debit balance of $200. The firm estimates its losses from uncollectible accounts to be one-half of 1 percent of net credit sales. The entry to record the estimated losses from uncollectible accounts will include a credit to Allowance for Doubtful Accounts for A. $4,500. B. $2,450. C. $2,250. D. $1,800.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Hard Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-39 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
42. On December 31, prior to adjustment, Allowance for Doubtful Accounts has a credit balance of $200. An aging Analyze of the accounts receivable produces an estimate of $1,000 of probable losses from uncollectible accounts. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $200. B. $800. C. $1,000. D. $1,200.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
43. On December 31, prior to adjustment, Allowance for Doubtful Accounts has a credit balance of $400. An aging analysis of the accounts receivable produces an estimate of $2,000 of probable losses from uncollectible accounts. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $400. B. $1,600. C. $2,000. D. $2,400.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-40 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
44. On December 31, prior to adjustment, Allowance for Doubtful Accounts has a debit balance of $400. An aging of the accounts receivable produces an estimate of $2,600 of probable losses from uncollectible accounts. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $2,200. B. $2,600. C. $3,000. D. $400.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Hard Topic: The Allowance Method of Accounting for Uncollectible Accounts
45. On December 31, prior to adjustment, Allowance for Doubtful Accounts has a debit balance of $800. An aging of the accounts receivable produces an estimate of $5,200 of probable losses from uncollectible accounts. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $800. B. $4,400. C. $5,200. D. $6,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Hard Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-41 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
46. On December 31, prior to adjustments, the balance of Accounts Receivable is $16,000 and Allowance for Doubtful Accounts has a credit balance of $95. The firm estimates its losses from uncollectible accounts to be 5% of accounts receivable at the end of the year. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $705. B. $800. C. $895. D. $95.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
47. On December 31, prior to adjustments, the balance of Accounts Receivable is $32,000 and Allowance for Doubtful Accounts has a credit balance of $190. The firm estimates its losses from uncollectible accounts to be 5% of accounts receivable at the end of the year. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $190. B. $1,410. C. $1,600. D. $1,790.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-42 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
48. On December 31, prior to adjustments, the balance of Accounts Receivable is $26,000 and Allowance for Doubtful Accounts has a debit balance of $300. The firm estimates its losses from uncollectible accounts to be 5% of accounts receivable at the end of the year. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $1,000. B. $1,300. C. $1,600. D. $300.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Hard Topic: The Allowance Method of Accounting for Uncollectible Accounts
49. On December 31, prior to adjustments, the balance of Accounts Receivable is $52,000 and Allowance for Doubtful Accounts has a debit balance of $600. The firm estimates its losses from uncollectible accounts to be 5% of accounts receivable at the end of the year. The adjusting entry needed to record the estimated losses from uncollectible accounts is made for A. $600. B. $2,000. C. $2,600. D. $3,200.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Hard Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-43 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
50. Allowance for Doubtful Accounts has a credit balance of $1,000 immediately before the write-off of a $300 account receivable. The credit balance of Allowance for Doubtful Accounts immediately after the write-off is A. $700. B. $1,000. C. $1,300. D. $300.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-02 Charge off uncollectible accounts using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
51. Allowance for Doubtful Accounts has a credit balance of $2,000 immediately before the write-off of a $600 account receivable. The balance of Allowance for Doubtful Accounts immediately after the write-off is A. $600 debit. B. $1,400 credit. C. $1,400 debit. D. $2,600 credit.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-02 Charge off uncollectible accounts using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
52. When the allowance method of recognizing losses from uncollectible accounts is used, the entry to record the write-off of a specific account consists of a debit to A. Uncollectible Accounts Expense and a credit to Accounts Receivable. B. Allowance for Doubtful Accounts and a credit to Accounts Receivable. C. Uncollectible Accounts Expense and a credit to Allowance for Doubtful Accounts. D. Accounts Receivable and a credit to Allowance for Doubtful Accounts.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-02 Charge off uncollectible accounts using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-44 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
53. A firm using the allowance method to provide for losses from uncollectible accounts collected the cash due from a customer whose account was previously written off. The entry to reinstate the customer's account included a credit to A. Sales. B. Accounts Receivable. C. Uncollectible Accounts Expense. D. Allowance for Doubtful Accounts.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-03 Record the collection of accounts previously written off using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
54. When a firm uses the allowance method to provide for losses for uncollectible accounts, the collection of an account previously written off as uncollectible requires an entry to A. reinstate the account receivable. B. increase the balance of the Sales account. C. reduce the balance of Uncollectible Accounts Expense. D. decrease the balance of the Allowance for Doubtful Accounts.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 15-03 Record the collection of accounts previously written off using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
55. Common internal controls for accounts receivable include: A. sending invoices and monthly statements. B. developing procedures that ensure that all credit sales are recorded and customers' accounts are debited. C. authorizing charge-off of accounts. D. all of the above are common internal controls for accounts receivable.
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 15-06 Recognize common internal controls for accounts receivable. Level: Medium Topic: Applying the Direct Charge-Off Method: Internal Control of Accounts Receivable
15-45 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
56. On December 31, 2014, prior to adjustments, Accounts Receivable has a debit balance of $356,000 and the Allowance for Doubtful Accounts has a credit balance of $1,200. The firm estimates its losses from uncollectible accounts to be 4% of accounts receivable at the end of the year. The amount of the adjusting entry needed to record the estimated losses from uncollectible accounts is A. $13,040 B. $14,240 C. $15,440 D. $17,800
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
57. On December 31, 2014, prior to adjustments, Accounts Receivable has a debit balance of $356,000 and the Allowance for Doubtful Accounts has a credit balance of $1,200. The firm estimates its losses from uncollectible accounts to be 4% of accounts receivable at the end of the year. The balance in the Allowance for Doubtful Accounts after the adjusting entry for the estimated losses from uncollectible accounts is A. $13,040 B. $14,240 C. $15,440 D. $17,800
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-46 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
58. On December 31, 2014, prior to adjustments, Accounts Receivable has a debit balance of $356,000 and the Allowance for Doubtful Accounts has a debit balance of $1,200. The firm estimates its losses from uncollectible accounts to be 4% of accounts receivable at the end of the year. The amount of the adjusting entry needed to record the estimated losses from uncollectible accounts is A. $13,040 B. $14,240 C. $15,440 D. $17,800
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
59. On December 31, 2013, prior to adjustments, Accounts Receivable has a debit balance of $370,000 and the Allowance for Doubtful Accounts has a credit balance of $400. The firm estimates its losses from uncollectible accounts to be 5% of accounts receivable at the end of the year. The amount of the adjusting entry needed to record the estimated losses from uncollectible accounts is A. $18,100 B. $18,500 C. $18,900 D. $17,800
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-47 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
60. Uncollectible Accounts Expense is classified as A. a Contra Asset on the Balance Sheet B. a Contra Expense on the Income Statement C. an Expense on the Income Statement D. a Liability on the Balance Sheet
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
61. On December 31, 2013, prior to adjustments, the Allowance for Doubtful Accounts has a debit balance of $750. An aging of the accounts receivable produces an estimate of $6,500 of probable losses from uncollectible accounts. The adjusting entry needed to record the estimated losses from uncollectible accounts includes a: A. a credit to Allowance for Doubtful Accounts for $6,500 B. a debit to Uncollectible Accounts Expense for $5,750 C. a credit to Allowance for Doubtful Accounts for $7,250 D. a debit to Uncollectible Accounts Expense for $6,500
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-48 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
62. On December 31, 2013, prior to adjustments, the Allowance for Doubtful Accounts has a debit balance of $750. An aging of the accounts receivable produces an estimate of $6,500 of probable losses from uncollectible accounts. The balance in the Allowance for Doubtful Accounts after the entry to record estimated losses from uncollectible accounts will be: A. a credit of $6,500 B. a credit of $5,750 C. a credit of $7,250 D. a debit of $6,500
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
63. Allowance for Doubtful Accounts has a debit balance of $500 at the end of the year, before adjustments. Sales for the year amounted to $870,000, sales discounts amounted to $30,000 and sales returns and allowances amounted to $40,000. If the uncollectible accounts expense is estimated at 2% of net sales, the amount of the adjusting entry to record the estimated losses from uncollectible accounts will be A. $17,400 B. $16,500 C. $16,000 D. $15,500
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-49 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
64. Allowance for Doubtful Accounts has a debit balance of $500 at the end of the year, before adjustments. Sales for the year amounted to $870,000, sales discounts amounted to $30,000 and sales returns and allowances amounted to $40,000. If the uncollectible accounts expense is estimated at 2% of net sales, the balance in the Allowance for Doubtful Accounts after the entry to record estimated losses from uncollectible accounts will be A. $17,400 B. $16,500 C. $16,000 D. $15,500
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
65. Allowance for Doubtful Accounts has a credit balance of $1,100 at the end of the year, before adjustments. Sales for the year amounted to $760,000, sales discounts amounted to $12,000 and sales returns and allowances amounted to $36,000. If the uncollectible accounts expense is estimated at 2% of net sales, the amount of the adjusting entry to record the estimated losses from uncollectible accounts will be A. $15,340 B. $13,140 C. $14,240 D. $15,200
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-50 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
Short Answer Questions
66. At the end of the current year, the trial balance of Kerry Hardware included the accounts and balances shown below. Credit sales were $7,000,000. Returns and allowances on these sales were $55,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.4 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for the current year? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts? 1. $27,780; 2. $27,780
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
67. At the end of the current year, the trial balance of Diane's Dress Shop included the accounts and balances shown below. Credit sales were $9,200,000. Returns and allowances on these sales were $55,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.4 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for the current year? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts? 1. $36,580; 2. $36,580
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-51 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
68. At the end of the current year, the trial balance of Monique's Fashion Industries included the accounts and balances shown below. Credit sales were $4,600,000. Returns and allowances on these sales were $27,500. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.3 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for the current year? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts? (Round your answers to the nearest dollar.) 1. $13,718; 2. $13,718
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-52 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
69. At the end of the current year, the trial balance of Carlton's Auto Sales included the accounts and balances shown below. Credit sales were $9,200,000. Returns and allowances on these sales were $55,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.3 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for the current year? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts? 1. $27,435; 2. $27,435
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
70. At the end of 2014, the trial balance of Bryant Paint Store included the accounts and balances shown below. Credit sales were $145,000. Returns and allowances on these sales were $2,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.3 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for 2014? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts for 2014? 1. $429; 2. $429
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-53 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
71. At the end of the current year, the trial balance of Cary's Craft Shop included the accounts and balances shown below. Credit sales were $290,000. Returns and allowances on these sales were $4,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.3 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for the current year? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts? 1. $858; 2. $858
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
72. At the end of the current year, the trial balance of Tracey's Consulting Services included the accounts and balances shown below. Credit sales were $90,000. Returns and allowances on these sales were $1,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.4 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for the current year? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts? 1. $356; 2. $356
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-54 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
73. At the end of the current year, the trial balance of Daniels' Furniture Store included the accounts and balances shown below. Credit sales were $180,000. Returns and allowances on these sales were $2,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 0.4 percent of net credit sales.
1. What is the estimated loss from uncollectible accounts for the current year? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts? 1. $712; 2. $712
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-55 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
74. At the end of the current year, the trial balance of Aaron's Kitchen Supply Corporation included the accounts and balances shown below. Credit sales were $4,600,000. Returns and allowances on these sales were $27,500. Assume that the firm bases its estimate of the loss from uncollectible accounts on 4 percent of accounts receivable.
1. What is the balance in the Allowance for Doubtful Accounts account after the adjusting entry for the estimated loss from uncollectible accounts is posted? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts? 1. $26,000; 2. $21,500
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-56 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
75. At the end of the current year, the trial balance of Bianca's Exports included the accounts and balances shown below. Credit sales were $9,200,000. Returns and allowances on these sales were $55,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 4 percent of accounts receivable.
1. What is the balance in the Allowance for Doubtful Accounts account after the adjusting entry for the estimated loss from uncollectible accounts is posted? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts? 1. $52,000; 2. $43,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-57 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
76. At the end of the current year, the trial balance of Kate's Cafe included the accounts and balances shown below. Credit sales were $90,000. Returns and allowances on these sales were $1,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 3 percent of accounts receivable.
1. What is the balance in the Allowance for Doubtful Accounts account after the adjusting entry for the estimated loss from uncollectible accounts is posted? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts? 1. $540; 2. $1,040
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-58 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
77. At the end of the current year, the trial balance of Johannes' Sporting Goods Shop included the accounts and balances shown below. Credit sales were $180,000. Returns and allowances on these sales were $2,000. Assume that the firm bases its estimate of the loss from uncollectible accounts on 3 percent of accounts receivable.
1. What is the balance in the Allowance for Doubtful Accounts account after the adjusting entry for the estimated loss from uncollectible accounts is posted? 2. What is the amount of the adjusting entry for the estimated loss from uncollectible accounts? 1. $1,080; 2. $2,080
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-59 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
78. The totals from the Savoy Company's Schedule of Accounts Receivable by Age as of the end of the current year are shown below.
As of the end of the current year, there is a debit balance of $75 in the Allowance for Doubtful Accounts. 1. Compute the estimated uncollectible accounts using the following rates.
2. Compute the amount of the adjusting entry for uncollectible accounts expense. 1. $457 ($92 + $75 + $90 + $200); 2. $532
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-60 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
79. The totals from the Kalvin Company's Schedule of Accounts Receivable by Age as of the end of the current year are shown below.
As of the end of the current year, there is a debit balance of $75 in the Allowance for Doubtful Accounts. 1. Compute the estimated uncollectible accounts using the following rates.
2. Compute the amount of the adjustment for uncollectible accounts expense. 1. $838 ($88 + $150 + $150 + $450); 2. $913
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Level: Medium Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-61 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
80. The Salinas Company uses the direct charge-off method to record uncollectible accounts. The following transactions occurred during 2013. Record the transactions on page 6 of a general journal, assuming the company also uses a Cash Receipts journal. Omit descriptions.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Learning Objective: 15-02 Charge off uncollectible accounts using the allowance method. Learning Objective: 15-03 Record the collection of accounts previously written off using the allowance method. Level: Hard Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-62 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
81. The Haven Company uses the allowance method to provide for losses from uncollectible accounts. Record the following selected transactions on page 3 of a general journal, assuming the company also uses a Cash Receipts journal. Omit descriptions.
15-63 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Learning Objective: 15-02 Charge off uncollectible accounts using the allowance method. Learning Objective: 15-03 Record the collection of accounts previously written off using the allowance method. Level: Hard Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-64 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
82. The Travel-Right Company uses the allowance method to provide for losses from uncollectible accounts. Record the following selected transactions on page 5 of a general journal, assuming the company also uses a cash receipts journal. Omit descriptions.
15-65 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Learning Objective: 15-02 Charge off uncollectible accounts using the allowance method. Learning Objective: 15-03 Record the collection of accounts previously written off using the allowance method. Level: Hard Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-66 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
83. Raymond Repair Services Company uses the direct charge-off method to record uncollectible accounts. On January 15, 2014, the company learned that Caroline Smith, a customer who owed $380, had moved and left no forwarding address. Raymond concluded that no part of the debt was collectible. Prepare the general journal entry to write off the account.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 15-04 Record losses from uncollectible accounts using the direct charge-off method. Level: Easy Topic: Applying the Direct Charge-Off Method: Internal Control of Accounts Receivable
15-67 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
84. On April 22, 2014, Raymond Repair Services Company received a check for $220 from Caroline Smith, whose $380 account was written off on January 15. In the accompanying letter, Smith apologized and said she probably would be unable to pay any of the remaining balance. Prepare the general journal entry necessary. (Assume the firm uses the direct chargeoff method. Also assume that the entry in the cash receipts journal has already been made.)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 15-05 Record the collection of accounts previously written off using the direct charge-off method. Level: Medium Topic: Applying the Direct Charge-Off Method: Internal Control of Accounts Receivable
15-68 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 15 - Accounts Receivable and Uncollectible Accounts
Matching Questions
85. Match the accounting terms with the description by entering the proper number. 1. Any account whose balance is revalued or reappraised in light of reasonable expectations 2. A method of recording uncollectible accounts as they occur 3. Classifying accounts receivable balances according to how long they have been outstanding 4. A method of recording uncollectible accounts that estimates losses from uncollectible accounts and charges them to expense in the period when the sales are recorded
Valuation account 1 Allowance method 4 Direct chargeoff method 2 Aging the accounts receivable 3
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 15-01 Record the estimated expense from uncollectible accounts receivable using the allowance method. Learning Objective: 15-02 Charge off uncollectible accounts using the allowance method. Learning Objective: 15-03 Record the collection of accounts previously written off using the allowance method. Learning Objective: 15-04 Record losses from uncollectible accounts using the direct charge-off method. Learning Objective: 15-05 Record the collection of accounts previously written off using the direct charge-off method. Learning Objective: 15-06 Recognize common internal controls for accounts receivable. Learning Objective: 15-07 Define the accounting terms new to this chapter. Level: Medium Topic: Applying the Direct Charge-Off Method: Internal Control of Accounts Receivable Topic: The Allowance Method of Accounting for Uncollectible Accounts
15-69 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 16 - Notes Payable and Notes Receivable
Chapter 16 Notes Payable and Notes Receivable True / False Questions
1. The interest on a $5,000 face value, 3-month note bearing interest at 9 percent a year would be $1,350. True False
2. A 2-month note dated January 1, 2010, will mature on the same date as a 60-day note dated January 1, 2010. True False
3. Upon payment of the amount due on a $4,000 face value, 60-day, 6 percent note, the accountant will record an entry that includes a debit to Notes Payable for $4,000. True False
4. The Interest Expense account usually has a credit balance. True False
5. Interest Expense usually appears on the income statement as a nonoperating expense. True False
6. If the proceeds of a discounted note are less than the face amount, the difference is debited to Interest Expense. True False
7. The entry to record the collection of the amount due on the maturity date of a note includes a debit to Notes Receivable. True False
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Chapter 16 - Notes Payable and Notes Receivable
8. Even if an interest-bearing note receivable is dishonored, interest income due on the note should be recorded. True False
9. The amount of cash received at maturity for a $5,000, 90-day, 6% note receivable is $75. True False
10. The face value of a noninterest-bearing note is its maturity value. True False
11. The Notes Receivable account usually has a credit balance. True False
12. If the amount of a note is not collected at maturity, the accountant should debit Uncollectible Accounts Expense and credit Notes Receivable. True False
13. Notes Receivable Discounted is usually shown in the Current Liabilities section of the balance sheet. True False
14. Interest Income is classified as a current asset. True False
15. Since notes receivable are negotiable, internal control procedures must be devised to protect them against fraud and theft. True False
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Chapter 16 - Notes Payable and Notes Receivable
16. An ordinary check is one form of draft. True False
Fill in the Blank Questions
17. The dollar amount shown on a note is called the principal, or ____________________ value. ________________________________________
18. The amount of interest that will accumulate on an $8,000 face value, 30-day note bearing interest at 12 percent is __________________. ________________________________________
19. The amount of cash paid at maturity date on a $9,000 face value, 60-day note bearing interest at 8% is _____________________. ________________________________________
20. The name given to the price charged for the use of money or credit is __________________. ________________________________________
21. A 90-day note issued May 10 matures on __________________. ________________________________________
22. The entry to record the issuance of a promissory note will include a(n) ____________________ to Notes Payable. ________________________________________
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Chapter 16 - Notes Payable and Notes Receivable
23. Interest Expense is usually classified as a(n) ____________________ expense on the income statement. ________________________________________
24. A 3-month note payable is classified as a(n) ____________________ liability on the balance sheet. ________________________________________
25. When a note payable is __________________, the lender deducts interest on the loan in advance, and the borrower receives only the difference between the face amount of the note and the interest on it to maturity. ________________________________________
26. If a note is not paid at maturity, it is said to be __________________. ________________________________________
27. A ____________________ draft is a commercial draft that is payable during a specified period of time. ________________________________________
28. Notes Receivable Discounted represents a(n) ____________________ liability. ________________________________________
29. When a note receivable is discounted, the net proceeds are computed by subtracting the discount charges from the ____________________ value of the note. ________________________________________
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Chapter 16 - Notes Payable and Notes Receivable
30. A(n) ____________________ is a written order that requires the person or business addressed to pay a stated sum of money to another person or firm or to the bearer. ________________________________________
31. To obtain cash on delivery, goods may be shipped with a sight draft attached to a(n) __________________. ________________________________________
32. A(n) ____________________ is a form of commercial time draft that arises out of the sale of goods and has this fact noted on its face. ________________________________________
Multiple Choice Questions
33. Which of the following statements is correct? A. To be considered a negotiable instrument, a promissory note must specify an interest rate. B. The amount shown on a note is called the face value. C. A company that issued a 6-month note payable would report its face value on the balance sheet as a long-term liability. D. A note payable must be payable at a specific time in the future.
34. How much interest will accrue on a $20,000 face value, 60-day note that bears interest at 9 percent a year? A. $300 B. $450 C. $900 D. $1,800
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Chapter 16 - Notes Payable and Notes Receivable
35. How much interest will accrue on a $40,000 face value, 60-day note that bears interest at 9 percent a year? A. $3,600 B. $1,800 C. $900 D. $600
36. How much interest will accrue on a $20,000 face value, 120-day note that bears interest at 9 percent a year? A. $600 B. $900 C. $1,800 D. $3,600
37. The amount of cash paid at maturity date on a $12,000 face value, 90-day note bearing interest at 10% is A. $1,200 B. $12,000 C. $300 D. $12,300
38. The amount of cash paid at maturity date on a $9,000 face value, 60-day note bearing interest at 6% is A. $9,720 B. $9,090 C. $9,000 D. $7,200
39. The total that must be paid when a note becomes due is known as the A. principal. B. face value. C. note value. D. maturity value.
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Chapter 16 - Notes Payable and Notes Receivable
40. A 30-day note dated October 15, would be due on November A. 14. B. 15. C. 16. D. 17.
41. A one-month note dated October 15, would be due on November A. 14. B. 15. C. 16. D. 17.
42. A 20-day note dated October 15, would be due on November A. 4. B. 5. C. 6. D. 7.
43. Which of the following statements is not correct? A. The entry to record the issuance of a promissory note includes a credit to Interest Payable for the amount of interest that will accrue on the note until it is paid at maturity. B. The Notes Payable account is always debited or credited for the face value of a note. C. The entry to record the issuance of a promissory note includes a credit to the Notes Payable account. D. The entry to credit the payment of a note payable includes a debit to the Notes Payable Account.
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Chapter 16 - Notes Payable and Notes Receivable
44. A firm purchased equipment for $6,000 on credit and issued a 120-day note bearing interest at 9 percent a year as evidence of the debt. To record this transaction, the accountant would debit A. Equipment for $6,000 and credit Notes Payable for $6,000. B. Equipment for $6,180, credit Interest Expense for $180, and credit Notes Payable for $6,000. C. Equipment for $6,000, debit Interest Expense for $180, and credit Notes Payable for $6,180. D. Equipment for $6,000 and credit Accounts Payable for $6,000.
45. A firm purchased equipment for $12,000 on credit and issued a 120-day note bearing interest at 9 percent a year as evidence of the debt. To record this transaction, the accountant would debit A. Equipment for $12,000 and credit Accounts Payable for $12,000. B. Equipment for $12,000 and credit Notes Payable for $12,000. C. Equipment for $12,360, credit Interest Expense for $360, and credit Notes Payable for $12,000. D. Equipment for $12,000, debit Interest Expense for $360, and credit Notes Payable for $12,360.
46. When a company issues a promissory note, the accountant records an entry that includes a credit to Note Payable for the A. face value of the note. B. face value of the note plus the interest that will accrue. C. face value less the interest that will accrue. D. maturity value of the note.
47. On March 1, a firm purchased equipment for $5,000, signing a 30-day note bearing interest at 12 percent a year. The entry to record the payment of the amount due on March 31 will include a debit to Notes Payable for A. $5,050 and a credit to Cash for $5,050. B. $5,000 and a credit to Cash for $5,000. C. $5,000, a debit to Interest Expense for $50, and a credit to Cash for $5,050. D. $5,000, a debit to Interest Expense for $600, and a credit to Cash for $5,600.
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Chapter 16 - Notes Payable and Notes Receivable
48. On January 1, a firm purchased equipment for $10,000, signing a 30-day note bearing interest at 12 percent a year. The entry to record the payment of the amount due on January 31 will include a debit to Notes Payable for A. $10,000 and a credit to Cash for $10,000. B. $10,100 and a credit to Cash for $10,100. C. $10,000, a debit to Interest Expense for $1,200, and a credit to Cash for $11,200. D. $10,000, a debit to Interest Expense for $100, and a credit to Cash for $10,100.
49. The maturity value of a 90-day note for $4,000 that bears interest at 10 percent a year is A. $4,400. B. $4,100. C. $4,000. D. $3,900.
50. The maturity value of a 90-day note for $8,000 that bears interest at 10 percent a year is A. $7,800. B. $8,000. C. $8,200. D. $8,800.
51. The maturity value of a 120-day note for $12,000 that bears interest at 8 percent a year is A. $12,000. B. $11,680. C. $12,320. D. $12,120.
52. The maturity value of a 60-day note for $6,000 that bears interest at 6 percent a year is A. $6,060. B. $6,600. C. $6,000. D. 5,940.
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Chapter 16 - Notes Payable and Notes Receivable
53. Notes payable due within one year are usually shown in the A. Current Assets section of the balance sheet. B. Current Liabilities section of the balance sheet. C. Other Expenses section of the income statement. D. Long-Term Liabilities section of the balance sheet.
54. Upon collection of the amount due on a $6,000 face value, 90-day note with interest at 10 percent a year, the Note Receivable account is A. debited for $6,600. B. credited for $6,000. C. credited for $6,150. D. debited for $6,000.
55. If the amount due on a note receivable is not collected at maturity, A. Allowance for Doubtful Accounts should immediately be debited. B. the note is said to be dishonored. C. the face value of the note should continue to be carried in the Notes Receivable account until all possible means of collecting the note have been exhausted. D. Uncollectible Accounts Expense should be debited.
56. The Jiminez Company accepted an interest-bearing note to settle a past-due account originating from a sale of merchandise. When the note is collected, the interest earned should be credited to A. Interest Income. B. Sales. C. Allowance for Doubtful Accounts. D. Notes Receivable.
57. The Interest Income account A. usually has a credit balance. B. is usually shown in the Current Assets section of the balance sheet. C. is debited when the firm records the effects of a dishonored note receivable. D. is credited when the firm accepts a note receivable from a customer.
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Chapter 16 - Notes Payable and Notes Receivable
58. A 60-day note dated April 1 was turned over to the bank for discounting on April 21. The number of days used in computing the dollar amount of the discount is A. 20. B. 40. C. 60. D. 30.
59. The Notes Receivable Discounted account A. is shown as a deduction from Notes Receivable on the balance sheet. B. has a debit balance. C. is used to record the amounts due on dishonored notes. D. is used to record the amount of interest deducted by the bank when a note is discounted.
60. If the proceeds of a note discounted at a bank are greater than the face value of the note, the difference is recognized as A. interest receivable. B. interest expense. C. notes receivable discounted. D. interest income.
61. Which of the following statements is not correct? A. When a note receivable is discounted, the proceeds are computed by subtracting the discount from the maturity value of the note. B. The entry to record the discounting of a note receivable may result in the recognition of interest expense. C. When a note is discounted at a bank, the proceeds are always less than the maturity value of the note. D. When a note receivable is discounted at a bank, the entry to record the transaction includes a debit to cash.
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Chapter 16 - Notes Payable and Notes Receivable
Short Answer Questions
62. Compute the amount of interest owed on a 60-day, 8 percent note for $9,000.
63. Compute the amount of interest owed on a 90-day, 10 percent note for $15,000.
64. Compute the amount of interest owed on a 6-month, 9 percent note for $6,000.
65. Compute the amount of interest owed on a 3-month, 7 percent note for $12,000.
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Chapter 16 - Notes Payable and Notes Receivable
66. Compute the amount of interest owed on a 4-month, 6 percent note for $7,000.
67. Find the due date of a 30-day note issued on November 10, 2010.
68. Find the due date of a 90-day note issued on June 6, 2010.
69. Find the due date of a 60-day note issued on January 18, 2010.
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Chapter 16 - Notes Payable and Notes Receivable
70. Find the due date of a 3-month note issued on September 12, 2010.
71. Compute the maturity value of a 90-day, 10 percent note with a face value of $1,000.
72. Compute the maturity value of a 30-day, 8 percent note with a face value of $6,000.
73. Compute the maturity value of a 4-month, 7 percent note with a face value of $4,000. (round answer to 2 decimal places)
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Chapter 16 - Notes Payable and Notes Receivable
74. Compute the maturity value of a 6-month, 9 percent note with a face value of $5,000.
75. Compute the maturity value of a 60-day, 7 percent note with a face value of $6,000.
76. Compute the maturity value of a 180-day, 6 percent note with a face value of $1,000.
77. Compute the maturity value of a 5-month, 8 percent note with a face value of $8,000. (round answer to 2 decimal places)
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Chapter 16 - Notes Payable and Notes Receivable
78. Compute the maturity value of a 9-month, 9 percent note with a face value of $9,000. (round answer to 2 decimal places)
79. The Gaynor Company had the following transactions involving notes payable during 2011. Record the transactions on page 5 of a general journal. Omit descriptions.
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Chapter 16 - Notes Payable and Notes Receivable
80. The Woo Corporation had the following transactions involving notes payable during 2013. Record the transactions on page 8 of a general journal. Omit descriptions.
81. The Martinez Company, had the following transactions involving notes payable during 2010. Record the transactions on page 11 of a general journal. Omit descriptions.
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Chapter 16 - Notes Payable and Notes Receivable
82. On October 10, 2011, the Berkeley Company accepted a 60-day, 9 percent note from Devon Reed in settlement of his past-due account for $3,000. On November 9, Berkeley Company discounted the note at the Security Bank. The bank charged a discount rate of 12 percent. Answer the following questions. (round your answers to 2 decimal places) 1. What is the maturity date of the note? 2. What is the maturity value of the note? 3. How many days are in the discount period? 4. What is the amount of the discount? 5. What is the amount of the proceeds?
83. On March 10, 2011, the Westwood Company accepted a 60-day, 9 percent note from Pete Houghton in settlement of his past-due account for $6,000. On April 9, Westwood Company discounted the note at the First National Bank. The bank charged a discount rate of 12 percent. Answer the following questions. 1. What is the maturity date of the note? 2. What is the maturity value of the note? 3. How many days are in the discount period? 4. What is the amount of the discount? 5. What is the amount of the proceeds?
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Chapter 16 - Notes Payable and Notes Receivable
84. On July 5, 2011, the Cowens Company accepted a 90-day, 10 percent note from Rhonda Ballard in settlement of his past-due account for $5,000. On Aug. 4, the Cowens Company discounted the note at the Investment Capital Bank. The bank charged a discount rate of 6 percent. Answer the following questions. 1. What is the maturity date of the note? 2. What is the maturity value of the note? 3. How many days are in the discount period? 4. What is the amount of the discount? 5. What is the amount of the proceeds?
85. The Crown Company had the following transactions involving notes receivable during 2011. Record the transactions on page 7 of a general journal. Omit descriptions.
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Chapter 16 - Notes Payable and Notes Receivable
86. The Madison Company had the following transactions involving notes receivable during 2011. Record the transactions on page 8 of a general journal. Omit descriptions.
87. The Hernandez Company had the following transactions involving notes receivable during 2011. Record the transactions on page 6 of a general journal. Omit descriptions.
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Chapter 16 - Notes Payable and Notes Receivable
Matching Questions
88. Match the accounting terms with the description by entering the proper number. 1. A business document that lists goods accepted for transportation 2. A note issued by one party that orders another party to pay a specified sum on a specified date 3. A draft on the issuing bank's own funds 4. A written order that requires one party (a person or business) to pay a stated sum of money to another party 5. A commercial draft that is payable during a specified period of time 6. A commercial draft that is payable on presentation 7. The amount shown on the face of a note 8. A check written by a bank that orders another bank to pay the stated amount to a specific party 9. The fee charged for the use of money 10. An amount of money indicated to be paid, exclusive of interest or discounts 11. A financial document containing a promise or order to pay that meets all requirements of the Uniform Commercial Code in order to be transferable to another party 12. A 360-day period used to calculate interest on a note 13. An asset representing a written promise by another party (the debtor) to pay the note holder (the creditor) a specified amount at a specified future date 14. The total amount (principal plus interest) that must be paid when a note comes due 15. Deducting the interest from the principal on a note payable or receivable in advance 16. A liability representing a written promise by the maker of the note (the debtor) to pay another party (the creditor) a specified amount at a specified future date 17. An item that can become a liability if certain things happen 18. A form of commercial time draft used in transactions involving the sale of goods
16-21
Cashier's check. ____ Negotiable instrument. ____ Bank draft. ____ Draft. ____ Sight draft. ____ Time draft. ____ Banker's year. ____ Bill of lading. ____ Commercial draft. ____ Face value. ____
Maturity value. ____ Principal. ____
Discounting. ____ Interest ____ Note receivable ____
Note payable ____ Trade acceptance ____ Contingent liability ____
Chapter 16 - Notes Payable and Notes Receivable
Chapter 16 Notes Payable and Notes Receivable Answer Key
True / False Questions
1. The interest on a $5,000 face value, 3-month note bearing interest at 9 percent a year would be $1,350. FALSE 5,000 x .09 x 3/12 = $112.50.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Level: Medium Topic: Accounting for Notes Payable
2. A 2-month note dated January 1, 2010, will mature on the same date as a 60-day note dated January 1, 2010. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-03 Determine the maturity date of a note. Level: Medium Topic: Accounting for Notes Payable
3. Upon payment of the amount due on a $4,000 face value, 60-day, 6 percent note, the accountant will record an entry that includes a debit to Notes Payable for $4,000. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
16-22
Chapter 16 - Notes Payable and Notes Receivable
4. The Interest Expense account usually has a credit balance. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 16-04 Record routine notes payable transactions. Level: Easy Topic: Accounting for Notes Payable
5. Interest Expense usually appears on the income statement as a nonoperating expense. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 16-04 Record routine notes payable transactions. Learning Objective: 16-05 Record discounted notes payable transactions. Level: Easy Topic: Accounting for Notes Payable
6. If the proceeds of a discounted note are less than the face amount, the difference is debited to Interest Expense. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-05 Record discounted notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
7. The entry to record the collection of the amount due on the maturity date of a note includes a debit to Notes Receivable. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-06 Record routine notes receivable transactions. Level: Medium Topic: Accounting for Notes Receivable
16-23
Chapter 16 - Notes Payable and Notes Receivable
8. Even if an interest-bearing note receivable is dishonored, interest income due on the note should be recorded. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-06 Record routine notes receivable transactions. Level: Medium Topic: Accounting for Notes Receivable
9. The amount of cash received at maturity for a $5,000, 90-day, 6% note receivable is $75. FALSE Cash received = 5075 = Interest (5,000 x 90/360 x .06 = $75) + principal ($5000).
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-06 Record routine notes receivable transactions. Level: Medium Topic: Accounting for Notes Receivable
10. The face value of a noninterest-bearing note is its maturity value. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 16-06 Record routine notes receivable transactions. Level: Easy Topic: Accounting for Notes Receivable
11. The Notes Receivable account usually has a credit balance. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 16-06 Record routine notes receivable transactions. Level: Easy Topic: Accounting for Notes Receivable
16-24
Chapter 16 - Notes Payable and Notes Receivable
12. If the amount of a note is not collected at maturity, the accountant should debit Uncollectible Accounts Expense and credit Notes Receivable. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-06 Record routine notes receivable transactions. Level: Medium Topic: Accounting for Notes Receivable
13. Notes Receivable Discounted is usually shown in the Current Liabilities section of the balance sheet. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Level: Easy Topic: Accounting for Notes Receivable
14. Interest Income is classified as a current asset. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Level: Easy Topic: Accounting for Notes Receivable
16-25
Chapter 16 - Notes Payable and Notes Receivable
15. Since notes receivable are negotiable, internal control procedures must be devised to protect them against fraud and theft. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 16-08 Understand how to use bank drafts and trade acceptances and how to record transactions related to those instruments. Level: Easy Topic: Accounting for Notes Receivable
16. An ordinary check is one form of draft. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 16-08 Understand how to use bank drafts and trade acceptances and how to record transactions related to those instruments. Level: Easy Topic: Accounting for Notes Receivable
Fill in the Blank Questions
17. The dollar amount shown on a note is called the principal, or ____________________ value. face
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 16-01 Determine whether an instrument meets all the requirements of negotiability. Level: Easy Topic: Accounting for Notes Payable
16-26
Chapter 16 - Notes Payable and Notes Receivable
18. The amount of interest that will accumulate on an $8,000 face value, 30-day note bearing interest at 12 percent is __________________. $80 8000 x 30/360 x .12 = 80.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Level: Medium Topic: Accounting for Notes Payable
19. The amount of cash paid at maturity date on a $9,000 face value, 60-day note bearing interest at 8% is _____________________. $9,120 9000 x 60/360 x .08 = 120; 9000 + 120 = 9,120.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Level: Medium Topic: Accounting for Notes Payable
20. The name given to the price charged for the use of money or credit is __________________. interest
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 16-02 Calculate the interest on a note. Level: Easy Topic: Accounting for Notes Payable
16-27
Chapter 16 - Notes Payable and Notes Receivable
21. A 90-day note issued May 10 matures on __________________. August 8 21 days in May + 30 days in June + 31 days in July = 82 days; 90 - 82 = 8 days into August.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-03 Determine the maturity date of a note. Level: Medium Topic: Accounting for Notes Payable
22. The entry to record the issuance of a promissory note will include a(n) ____________________ to Notes Payable. credit
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 16-04 Record routine notes payable transactions. Level: Easy Topic: Accounting for Notes Payable
23. Interest Expense is usually classified as a(n) ____________________ expense on the income statement. other; nonoperating
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 16-04 Record routine notes payable transactions. Learning Objective: 16-05 Record discounted notes payable transactions. Level: Easy Topic: Accounting for Notes Payable
16-28
Chapter 16 - Notes Payable and Notes Receivable
24. A 3-month note payable is classified as a(n) ____________________ liability on the balance sheet. current
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 16-04 Record routine notes payable transactions. Learning Objective: 16-05 Record discounted notes payable transactions. Level: Easy Topic: Accounting for Notes Payable
25. When a note payable is __________________, the lender deducts interest on the loan in advance, and the borrower receives only the difference between the face amount of the note and the interest on it to maturity. discounted
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 16-05 Record discounted notes payable transactions. Level: Easy Topic: Accounting for Notes Payable
26. If a note is not paid at maturity, it is said to be __________________. dishonored
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 16-06 Record routine notes receivable transactions. Level: Easy Topic: Accounting for Notes Receivable
16-29
Chapter 16 - Notes Payable and Notes Receivable
27. A ____________________ draft is a commercial draft that is payable during a specified period of time. time
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 16-08 Understand how to use bank drafts and trade acceptances and how to record transactions related to those instruments. Level: Easy Topic: Accounting for Notes Receivable
28. Notes Receivable Discounted represents a(n) ____________________ liability. contingent
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Level: Easy Topic: Accounting for Notes Receivable
29. When a note receivable is discounted, the net proceeds are computed by subtracting the discount charges from the ____________________ value of the note. maturity
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Level: Easy Topic: Accounting for Notes Receivable
16-30
Chapter 16 - Notes Payable and Notes Receivable
30. A(n) ____________________ is a written order that requires the person or business addressed to pay a stated sum of money to another person or firm or to the bearer. draft
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 16-08 Understand how to use bank drafts and trade acceptances and how to record transactions related to those instruments. Level: Easy Topic: Accounting for Notes Receivable
31. To obtain cash on delivery, goods may be shipped with a sight draft attached to a(n) __________________. bill of lading
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 16-08 Understand how to use bank drafts and trade acceptances and how to record transactions related to those instruments. Level: Easy Topic: Accounting for Notes Receivable
32. A(n) ____________________ is a form of commercial time draft that arises out of the sale of goods and has this fact noted on its face. trade acceptance
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 16-08 Understand how to use bank drafts and trade acceptances and how to record transactions related to those instruments. Level: Easy Topic: Accounting for Notes Receivable
16-31
Chapter 16 - Notes Payable and Notes Receivable
Multiple Choice Questions
33. Which of the following statements is correct? A. To be considered a negotiable instrument, a promissory note must specify an interest rate. B. The amount shown on a note is called the face value. C. A company that issued a 6-month note payable would report its face value on the balance sheet as a long-term liability. D. A note payable must be payable at a specific time in the future.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
34. How much interest will accrue on a $20,000 face value, 60-day note that bears interest at 9 percent a year? A. $300 B. $450 C. $900 D. $1,800 20,000 x 60/360 x 9% = $300.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Level: Medium Topic: Accounting for Notes Payable
16-32
Chapter 16 - Notes Payable and Notes Receivable
35. How much interest will accrue on a $40,000 face value, 60-day note that bears interest at 9 percent a year? A. $3,600 B. $1,800 C. $900 D. $600 40000 x 60/360 x .09 = 600.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Level: Medium Topic: Accounting for Notes Payable
36. How much interest will accrue on a $20,000 face value, 120-day note that bears interest at 9 percent a year? A. $600 B. $900 C. $1,800 D. $3,600 20000 x 120/360 x .09 = 600.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Level: Medium Topic: Accounting for Notes Payable
16-33
Chapter 16 - Notes Payable and Notes Receivable
37. The amount of cash paid at maturity date on a $12,000 face value, 90-day note bearing interest at 10% is A. $1,200 B. $12,000 C. $300 D. $12,300 12000 x 90/360 x .10 = 300; 12000 + 300 = 12300.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Level: Medium Topic: Accounting for Notes Payable
38. The amount of cash paid at maturity date on a $9,000 face value, 60-day note bearing interest at 6% is A. $9,720 B. $9,090 C. $9,000 D. $7,200 9000 x 60/360 x .06 = 90; 9000 + 90 = 9090.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Level: Medium Topic: Accounting for Notes Payable
16-34
Chapter 16 - Notes Payable and Notes Receivable
39. The total that must be paid when a note becomes due is known as the A. principal. B. face value. C. note value. D. maturity value.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 16-03 Determine the maturity date of a note. Level: Easy Topic: Accounting for Notes Payable
40. A 30-day note dated October 15, would be due on November A. 14. B. 15. C. 16. D. 17. 16 days in October + 14 days into November.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-03 Determine the maturity date of a note. Level: Medium Topic: Accounting for Notes Payable
41. A one-month note dated October 15, would be due on November A. 14. B. 15. C. 16. D. 17. One month note due on the same day exactly one month later.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-03 Determine the maturity date of a note. Level: Medium Topic: Accounting for Notes Payable
16-35
Chapter 16 - Notes Payable and Notes Receivable
42. A 20-day note dated October 15, would be due on November A. 4. B. 5. C. 6. D. 7. 16 days in October + 4 days into November.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-03 Determine the maturity date of a note. Level: Medium Topic: Accounting for Notes Payable
43. Which of the following statements is not correct? A. The entry to record the issuance of a promissory note includes a credit to Interest Payable for the amount of interest that will accrue on the note until it is paid at maturity. B. The Notes Payable account is always debited or credited for the face value of a note. C. The entry to record the issuance of a promissory note includes a credit to the Notes Payable account. D. The entry to credit the payment of a note payable includes a debit to the Notes Payable Account.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
16-36
Chapter 16 - Notes Payable and Notes Receivable
44. A firm purchased equipment for $6,000 on credit and issued a 120-day note bearing interest at 9 percent a year as evidence of the debt. To record this transaction, the accountant would debit A. Equipment for $6,000 and credit Notes Payable for $6,000. B. Equipment for $6,180, credit Interest Expense for $180, and credit Notes Payable for $6,000. C. Equipment for $6,000, debit Interest Expense for $180, and credit Notes Payable for $6,180. D. Equipment for $6,000 and credit Accounts Payable for $6,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
45. A firm purchased equipment for $12,000 on credit and issued a 120-day note bearing interest at 9 percent a year as evidence of the debt. To record this transaction, the accountant would debit A. Equipment for $12,000 and credit Accounts Payable for $12,000. B. Equipment for $12,000 and credit Notes Payable for $12,000. C. Equipment for $12,360, credit Interest Expense for $360, and credit Notes Payable for $12,000. D. Equipment for $12,000, debit Interest Expense for $360, and credit Notes Payable for $12,360.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
16-37
Chapter 16 - Notes Payable and Notes Receivable
46. When a company issues a promissory note, the accountant records an entry that includes a credit to Note Payable for the A. face value of the note. B. face value of the note plus the interest that will accrue. C. face value less the interest that will accrue. D. maturity value of the note.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 16-04 Record routine notes payable transactions. Level: Easy Topic: Accounting for Notes Payable
47. On March 1, a firm purchased equipment for $5,000, signing a 30-day note bearing interest at 12 percent a year. The entry to record the payment of the amount due on March 31 will include a debit to Notes Payable for A. $5,050 and a credit to Cash for $5,050. B. $5,000 and a credit to Cash for $5,000. C. $5,000, a debit to Interest Expense for $50, and a credit to Cash for $5,050. D. $5,000, a debit to Interest Expense for $600, and a credit to Cash for $5,600.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
48. On January 1, a firm purchased equipment for $10,000, signing a 30-day note bearing interest at 12 percent a year. The entry to record the payment of the amount due on January 31 will include a debit to Notes Payable for A. $10,000 and a credit to Cash for $10,000. B. $10,100 and a credit to Cash for $10,100. C. $10,000, a debit to Interest Expense for $1,200, and a credit to Cash for $11,200. D. $10,000, a debit to Interest Expense for $100, and a credit to Cash for $10,100.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
16-38
Chapter 16 - Notes Payable and Notes Receivable
49. The maturity value of a 90-day note for $4,000 that bears interest at 10 percent a year is A. $4,400. B. $4,100. C. $4,000. D. $3,900. 4,000 x 90/360 x .1 = 100; 4,000 + 100 = $4,100.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
50. The maturity value of a 90-day note for $8,000 that bears interest at 10 percent a year is A. $7,800. B. $8,000. C. $8,200. D. $8,800. 8,000 x 90/360 x .1 = 200; 8,000 + 200 = $8,200.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
16-39
Chapter 16 - Notes Payable and Notes Receivable
51. The maturity value of a 120-day note for $12,000 that bears interest at 8 percent a year is A. $12,000. B. $11,680. C. $12,320. D. $12,120. 12,000 x 120/360 x .08 = 320; 12,000 + 320 = 12,320.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
52. The maturity value of a 60-day note for $6,000 that bears interest at 6 percent a year is A. $6,060. B. $6,600. C. $6,000. D. 5,940. 6,000 x 60/360 x .06 = 60; 6,000 + 60 = 6,060.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
16-40
Chapter 16 - Notes Payable and Notes Receivable
53. Notes payable due within one year are usually shown in the A. Current Assets section of the balance sheet. B. Current Liabilities section of the balance sheet. C. Other Expenses section of the income statement. D. Long-Term Liabilities section of the balance sheet.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-04 Record routine notes payable transactions. Learning Objective: 16-05 Record discounted notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
54. Upon collection of the amount due on a $6,000 face value, 90-day note with interest at 10 percent a year, the Note Receivable account is A. debited for $6,600. B. credited for $6,000. C. credited for $6,150. D. debited for $6,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-06 Record routine notes receivable transactions. Level: Medium Topic: Accounting for Notes Receivable
55. If the amount due on a note receivable is not collected at maturity, A. Allowance for Doubtful Accounts should immediately be debited. B. the note is said to be dishonored. C. the face value of the note should continue to be carried in the Notes Receivable account until all possible means of collecting the note have been exhausted. D. Uncollectible Accounts Expense should be debited.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 16-06 Record routine notes receivable transactions. Level: Easy Topic: Accounting for Notes Receivable
16-41
Chapter 16 - Notes Payable and Notes Receivable
56. The Jiminez Company accepted an interest-bearing note to settle a past-due account originating from a sale of merchandise. When the note is collected, the interest earned should be credited to A. Interest Income. B. Sales. C. Allowance for Doubtful Accounts. D. Notes Receivable.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 16-06 Record routine notes receivable transactions. Level: Easy Topic: Accounting for Notes Receivable
57. The Interest Income account A. usually has a credit balance. B. is usually shown in the Current Assets section of the balance sheet. C. is debited when the firm records the effects of a dishonored note receivable. D. is credited when the firm accepts a note receivable from a customer.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 16-06 Record routine notes receivable transactions. Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Level: Easy Topic: Accounting for Notes Receivable
16-42
Chapter 16 - Notes Payable and Notes Receivable
58. A 60-day note dated April 1 was turned over to the bank for discounting on April 21. The number of days used in computing the dollar amount of the discount is A. 20. B. 40. C. 60. D. 30. 20 days had elapsed from April 1 to April 21.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Level: Medium Topic: Accounting for Notes Receivable
59. The Notes Receivable Discounted account A. is shown as a deduction from Notes Receivable on the balance sheet. B. has a debit balance. C. is used to record the amounts due on dishonored notes. D. is used to record the amount of interest deducted by the bank when a note is discounted.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Level: Easy Topic: Accounting for Notes Receivable
16-43
Chapter 16 - Notes Payable and Notes Receivable
60. If the proceeds of a note discounted at a bank are greater than the face value of the note, the difference is recognized as A. interest receivable. B. interest expense. C. notes receivable discounted. D. interest income.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Level: Easy Topic: Accounting for Notes Receivable
61. Which of the following statements is not correct? A. When a note receivable is discounted, the proceeds are computed by subtracting the discount from the maturity value of the note. B. The entry to record the discounting of a note receivable may result in the recognition of interest expense. C. When a note is discounted at a bank, the proceeds are always less than the maturity value of the note. D. When a note receivable is discounted at a bank, the entry to record the transaction includes a debit to cash.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Level: Medium Topic: Accounting for Notes Receivable
16-44
Chapter 16 - Notes Payable and Notes Receivable
Short Answer Questions
62. Compute the amount of interest owed on a 60-day, 8 percent note for $9,000. $120 Feedback: $120 = 9000 x .08 x 60/360.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Level: Medium Topic: Accounting for Notes Payable
63. Compute the amount of interest owed on a 90-day, 10 percent note for $15,000. $375 Feedback: $375 = 15,000 x .10 x 90/360.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Level: Medium Topic: Accounting for Notes Payable
64. Compute the amount of interest owed on a 6-month, 9 percent note for $6,000. $270 Feedback: $270 = 6000 x .09 x 9/12.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Level: Medium Topic: Accounting for Notes Payable
16-45
Chapter 16 - Notes Payable and Notes Receivable
65. Compute the amount of interest owed on a 3-month, 7 percent note for $12,000. $210 Feedback: $210 = 12,000 x .07 x 3/12.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Level: Medium Topic: Accounting for Notes Payable
66. Compute the amount of interest owed on a 4-month, 6 percent note for $7,000. $140 Feedback: $140 = 7,000 x .06 x 4/12.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Level: Medium Topic: Accounting for Notes Payable
67. Find the due date of a 30-day note issued on November 10, 2010. December 10, 2010 Feedback: 20 days in November + 10 days into December.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-03 Determine the maturity date of a note. Level: Medium Topic: Accounting for Notes Payable
16-46
Chapter 16 - Notes Payable and Notes Receivable
68. Find the due date of a 90-day note issued on June 6, 2010. September 4, 2010 Feedback: 24 days in June + 31 days in July + 31 days in August + 4 days into September.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-03 Determine the maturity date of a note. Level: Medium Topic: Accounting for Notes Payable
69. Find the due date of a 60-day note issued on January 18, 2010. March 19, 2010 Feedback: 13 days in January + 28 days in February + 19 days into March.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-03 Determine the maturity date of a note. Level: Medium Topic: Accounting for Notes Payable
70. Find the due date of a 3-month note issued on September 12, 2010. December 12, 2010 Feedback: On a 3-month note, the due date is the same day exactly 3 months later.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-03 Determine the maturity date of a note. Level: Medium Topic: Accounting for Notes Payable
16-47
Chapter 16 - Notes Payable and Notes Receivable
71. Compute the maturity value of a 90-day, 10 percent note with a face value of $1,000. $1,025 Feedback: $1025 = (1,000 x .1 x 90/360) + 1,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
72. Compute the maturity value of a 30-day, 8 percent note with a face value of $6,000. $6,040 Feedback: $6040 = (6,000 x .08 x 30/360) + 6,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
73. Compute the maturity value of a 4-month, 7 percent note with a face value of $4,000. (round answer to 2 decimal places) $4,093.33 Feedback: $4093.33 = (4,000 x .07 x 4/12) + 4,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
16-48
Chapter 16 - Notes Payable and Notes Receivable
74. Compute the maturity value of a 6-month, 9 percent note with a face value of $5,000. $5,225 Feedback: $5,255 = (5,000 x .09 x 6/12) + 5,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
75. Compute the maturity value of a 60-day, 7 percent note with a face value of $6,000. $6,070 Feedback: $6,070 = (6,000 x .07 x 60/360) + 6,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
76. Compute the maturity value of a 180-day, 6 percent note with a face value of $1,000. $1,030 Feedback: $1,030 = (1,000 x .06 x 180/360) + 1,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
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Chapter 16 - Notes Payable and Notes Receivable
77. Compute the maturity value of a 5-month, 8 percent note with a face value of $8,000. (round answer to 2 decimal places) $8266.67 Feedback: $8266.67= (8,000 x .08 x 5/12) + 8,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
78. Compute the maturity value of a 9-month, 9 percent note with a face value of $9,000. (round answer to 2 decimal places) $9607.50 Feedback: $9607.50= (9,000 x .09 x 9/12) + 9,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 16-02 Calculate the interest on a note. Learning Objective: 16-04 Record routine notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
16-50
Chapter 16 - Notes Payable and Notes Receivable
79. The Gaynor Company had the following transactions involving notes payable during 2011. Record the transactions on page 5 of a general journal. Omit descriptions.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-04 Record routine notes payable transactions. Learning Objective: 16-05 Record discounted notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
16-51
Chapter 16 - Notes Payable and Notes Receivable
80. The Woo Corporation had the following transactions involving notes payable during 2013. Record the transactions on page 8 of a general journal. Omit descriptions.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-04 Record routine notes payable transactions. Learning Objective: 16-05 Record discounted notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
16-52
Chapter 16 - Notes Payable and Notes Receivable
81. The Martinez Company, had the following transactions involving notes payable during 2010. Record the transactions on page 11 of a general journal. Omit descriptions.
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Chapter 16 - Notes Payable and Notes Receivable
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-04 Record routine notes payable transactions. Learning Objective: 16-05 Record discounted notes payable transactions. Level: Medium Topic: Accounting for Notes Payable
82. On October 10, 2011, the Berkeley Company accepted a 60-day, 9 percent note from Devon Reed in settlement of his past-due account for $3,000. On November 9, Berkeley Company discounted the note at the Security Bank. The bank charged a discount rate of 12 percent. Answer the following questions. (round your answers to 2 decimal places) 1. What is the maturity date of the note? 2. What is the maturity value of the note? 3. How many days are in the discount period? 4. What is the amount of the discount? 5. What is the amount of the proceeds? 1. December 9, 2011; 2. $3,045; 3. 30 days; 4. $30.45; 5. $3,014.55
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 16-06 Record routine notes receivable transactions. Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Level: Hard Topic: Accounting for Notes Receivable
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Chapter 16 - Notes Payable and Notes Receivable
83. On March 10, 2011, the Westwood Company accepted a 60-day, 9 percent note from Pete Houghton in settlement of his past-due account for $6,000. On April 9, Westwood Company discounted the note at the First National Bank. The bank charged a discount rate of 12 percent. Answer the following questions. 1. What is the maturity date of the note? 2. What is the maturity value of the note? 3. How many days are in the discount period? 4. What is the amount of the discount? 5. What is the amount of the proceeds? 1. May 9, 2011; 2. $6,090; 3. 30 days; 4. $60.90; 5. $6,029.10
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 16-06 Record routine notes receivable transactions. Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Level: Hard Topic: Accounting for Notes Receivable
84. On July 5, 2011, the Cowens Company accepted a 90-day, 10 percent note from Rhonda Ballard in settlement of his past-due account for $5,000. On Aug. 4, the Cowens Company discounted the note at the Investment Capital Bank. The bank charged a discount rate of 6 percent. Answer the following questions. 1. What is the maturity date of the note? 2. What is the maturity value of the note? 3. How many days are in the discount period? 4. What is the amount of the discount? 5. What is the amount of the proceeds? 1.Oct. 3, 2011; 2. $5,125; 3. 60 days; 4. $51.25; 5. $5,073.75
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 16-06 Record routine notes receivable transactions. Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Level: Hard Topic: Accounting for Notes Receivable
16-55
Chapter 16 - Notes Payable and Notes Receivable
85. The Crown Company had the following transactions involving notes receivable during 2011. Record the transactions on page 7 of a general journal. Omit descriptions.
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Chapter 16 - Notes Payable and Notes Receivable
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-06 Record routine notes receivable transactions. Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Level: Medium Topic: Accounting for Notes Receivable
86. The Madison Company had the following transactions involving notes receivable during 2011. Record the transactions on page 8 of a general journal. Omit descriptions.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-06 Record routine notes receivable transactions. Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Level: Medium Topic: Accounting for Notes Receivable
16-57
Chapter 16 - Notes Payable and Notes Receivable
87. The Hernandez Company had the following transactions involving notes receivable during 2011. Record the transactions on page 6 of a general journal. Omit descriptions.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 16-06 Record routine notes receivable transactions. Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Level: Medium Topic: Accounting for Notes Receivable
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Chapter 16 - Notes Payable and Notes Receivable
Matching Questions
88. Match the accounting terms with the description by entering the proper number. 1. A business document that lists goods accepted for transportation 2. A note issued by one party that orders another party to pay a specified sum on a specified date 3. A draft on the issuing bank's own funds 4. A written order that requires one party (a person or business) to pay a stated sum of money to another party 5. A commercial draft that is payable during a specified period of time 6. A commercial draft that is payable on presentation 7. The amount shown on the face of a note 8. A check written by a bank that orders another bank to pay the stated amount to a specific party 9. The fee charged for the use of money 10. An amount of money indicated to be paid, exclusive of interest or discounts 11. A financial document containing a promise or order to pay that meets all requirements of the Uniform Commercial Code in order to be transferable to another party 12. A 360-day period used to calculate interest on a note 13. An asset representing a written promise by another party (the debtor) to pay the note holder (the creditor) a specified amount at a specified future date 14. The total amount (principal plus interest) that must be paid when a note comes due 15. Deducting the interest from the principal on a note payable or receivable in advance 16. A liability representing a written promise by the maker of the note (the debtor) to pay another party (the creditor) a specified amount at a specified future date 17. An item that can become a liability if certain things happen 18. A form of commercial time draft used in transactions involving the sale of goods
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Cashier's check. 3 Negotiable instrument. 11 Bank draft. 8 Draft. 4 Sight draft. 6 Time draft. 5 Banker's year. 12 Bill of lading. 1 Commercial draft. 2 Face value. 10
Maturity value. 14 Principal. 7
Discounting. 15 Interest 9 Note receivable 13
Note payable 16 Trade acceptance 18 Contingent liability 17
Chapter 16 - Notes Payable and Notes Receivable
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 16-01 Determine whether an instrument meets all the requirements of negotiability. Learning Objective: 16-02 Calculate the interest on a note. Learning Objective: 16-03 Determine the maturity date of a note. Learning Objective: 16-04 Record routine notes payable transactions. Learning Objective: 16-05 Record discounted notes payable transactions. Learning Objective: 16-06 Record routine notes receivable transactions. Learning Objective: 16-07 Compute the proceeds from a discounted note receivable; and record transactions related to discounting of notes receivable. Learning Objective: 16-08 Understand how to use bank drafts and trade acceptances and how to record transactions related to those instruments. Learning Objective: 16-09 Define the accounting terms new to this chapter. Level: Easy Topic: Accounting for Notes Payable Topic: Accounting for Notes Receivable
16-60
Chapter 17 - Merchandise Inventory
Chapter 17 Merchandise Inventory True / False Questions
1. In a period of rising prices, the LIFO method of inventory valuation results in a lower reported net income than the FIFO method. True False
2. The FIFO method of inventory valuation focuses on the balance sheet; the most current costs are in ending inventory. True False
3. The LIFO method of inventory valuation assigns the cost of the most recent purchases to the ending inventory. True False
4. The use of the FIFO method of inventory valuation results in a matching of current inventory costs against current sales revenue. True False
5. Inventory cannot be valued at the lower of cost or market if the inventory cost was determined using the FIFO methods. True False
6. Under the gross profit method of estimating inventory, the ending inventory is determined by subtracting the estimated cost of goods sold from the cost of goods available for sale. True False
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Chapter 17 - Merchandise Inventory
7. Gross profit ratio is determined by dividing Net Sales by Gross Profit. True False
8. The average cost method of inventory valuation will always result in the lowest reported net income. True False
9. Following the consistency principle, once a firm adopts a method of inventory valuation, it should use that method consistently from one period to the next. True False
10. If a firm uses the FIFO method of inventory valuation for tax purposes, it must use the FIFO method for financial accounting. True False
11. When the replacement cost of an item is below its original purchase cost, it is necessary to value the inventory at market price in order to reflect the lower current value in the firm's financial records. True False
12. The most conservative method of applying the lower of cost or market rule is to use the lower of total cost or total market by groups. True False
13. The fundamental assumption of the gross profit method of estimating inventory is that the rate of gross profit on sales is about the same from period to period. True False
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Chapter 17 - Merchandise Inventory
14. Many retail stores take a periodic inventory at retail values, using the sales price marked on the merchandise. True False
15. Inventory valuation is very important in computing federal income tax because the value placed on the inventory determines the net income reported. True False
16. A physical inventory should be taken at least annually to verify the goods on hand. True False
17. For internal control, unit figures used to compute the inventory should be verified through spot checks. True False
Fill in the Blank Questions
18. A price reduction below the original markon is ________________. ________________________________________
19. The ________________ method of inventory costing must be used for financial accounting purposes if it is chosen for federal income tax purposes. ________________________________________
20. The price the business would have to pay to buy an item of inventory through usual channels in usual quantities is either market price or __________________ cost. ________________________________________
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Chapter 17 - Merchandise Inventory
21. Net Sales minus Gross Profit equals ___________________. ________________________________________
22. The lower the ending inventory valuation, the ____________________ the reported net income. ________________________________________
23. A merchant who deals in one-of-a-kind items with large unit costs may account for inventory by the _________________________ method. ________________________________________
24. When the ____________________ method is used, the cost of the ending inventory is computed by using the cost of the latest purchases. ________________________________________
25. The ____________________ method of inventory valuation is a procedure developed for charging the current costs of goods against current sales prices. ________________________________________
26. When inventory is valued at the lower of cost or market, the accountant is applying the principle or convention called ___________________. ________________________________________
27. The ____________________ method of estimating inventory requires the use of data about both cost and selling prices. ________________________________________
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Chapter 17 - Merchandise Inventory
28. The ____________________ method of estimating ending inventory involves estimating the cost of goods sold by applying a company's cost/sales ratio to its sales for the current period. ________________________________________
29. In periods of rising prices, use of the ____________________ method of inventory valuation results in the lowest inventory cost on the balance sheet. ________________________________________
30. In the ____________________ method of inventory valuation, inventory cost is determined by multiplying the number of units in inventory by a unit cost, which is calculated by dividing the cost of goods available for sale by the units of merchandise available for sale. ________________________________________
31. The _________________________ account is the one account that appears on both the balance sheet and the income statement. ________________________________________
32. The lower the ending inventory valuation, the ____________________ the cost of goods sold. ________________________________________
Multiple Choice Questions
33. In periods of rising prices, the inventory valuation procedure that results in the highest net income is A. the lower of cost or market method. B. the LIFO method. C. the average cost method. D. the FIFO method.
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Chapter 17 - Merchandise Inventory
34. If other items remain the same, the larger the ending inventory valuation, the A. higher the cost of goods sold. B. higher the reported net income. C. lower the reported gross profit on sales. D. lower the reported net income.
35. A firm that sells a single product had a beginning inventory of 4,000 units with a total cost of $28,000. Early in the year, 10,000 units were purchased at $9 each. Using FIFO, what is the value of the ending inventory of 3,000 units? A. $27,000 B. $24,000 C. $21,000 D. $36,000
36. A firm that sells a single product had a beginning inventory of 4,000 units with a total cost of $16,000. Early in the year, 8,000 units were purchased at $6 each. Using LIFO, what is the value of the ending inventory of 2,000 units? A. $12,000 B. $10,000 C. $8,000 D. $24,000
37. Which of the following inventory costing procedures requires a physical count of merchandise a minimum of once a year at yearend? A. the retail method B. the average cost method C. the gross profit method D. the lower of cost or market method
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Chapter 17 - Merchandise Inventory
38. The gross profit method of determining ending inventory cost A. can be used without taking a physical count of merchandise. B. provides accurate information about the number of units in inventory. C. requires that a firm keep inventory and purchases data at retail value as well as at cost. D. requires that the inventory be classified into groups of items of about the same rate of mark on.
39. The accountant for a company whose inventory was destroyed by fire determined from undamaged records that the cost of goods available for sale was $100,000 and the net sales were $80,000 up to the date of the fire. The accountant also determined that the company's normal gross profit rate is 40 percent of net sales. From this data, the accountant estimated the cost of the inventory destroyed by the fire to be A. $60,000. B. $52,000. C. $32,000. D. $20,000.
40. The merchandise available for sale cost a company $90,000 and was marked to sell at a retail price of $125,000. Sales during the period totaled $80,000. If the retail method is used, the estimated cost of the ending inventory is A. $32,400. B. $12,600. C. $22,400. D. $45,000.
41. The weighted average cost of an inventory item is calculated by A. dividing the sum of the unit cost on the purchase invoices by the number of units purchased. B. dividing the cost of goods available for sale by the number of units on the ending inventory. C. dividing the cost of goods available for sale by the number of units available during the period. D. dividing the cost of goods sold by the number of units available during the period.
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Chapter 17 - Merchandise Inventory
42. The modifying convention of conservatism requires that inventory be presented on the balance sheet at A. cost. B. market value. C. either cost or market value, whichever is lower. D. average cost during the period.
43. The cost of the earliest merchandise purchased is assigned to ending inventory when a company uses A. the LIFO method. B. the FIFO method. C. the average cost method. D. the lower of cost or market method.
44. A matching of the most recent costs to revenue results from the use of A. the LIFO method. B. the FIFO method. C. the average cost method. D. the lower of cost or market method.
45. The use of the FIFO method of inventory valuation A. results in a matching of current inventory costs against sales revenue. B. results in the most current costs in ending inventory. C. results in a lowest reported net income in a time of rising prices. D. results in a highest reported net income in a time of falling prices.
46. The use of the LIFO method of inventory valuation A. assigns the cost of the most recent purchases to the ending inventory. B. results in the same valuation as the specific identification method in a time of rising prices. C. results in the lowest reported net income in a time of rising prices. D. results in the highest reported net income in a time of rising prices.
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Chapter 17 - Merchandise Inventory
47. The firm had a beginning inventory of 50 units with a unit cost of $10. Purchases during the year were as follows: March—50 units with a unit cost of $12; July—60 units with a unit cost of $15. If the average cost method is used, the value of the ending inventory of 45 units is A. $675. B. $563. C. $450. D. $555.
48. Which of the following is NOT a way to apply the lower of cost or market rule? A. by item B. by size C. in total D. by group
49. The Lower of Cost or Market rule is based on which accounting principle? A. conservatism B. revenue recognition C. matching D. full disclosure
50. The price a business would pay for its inventory is A. assessed value. B. sales price. C. replacement cost. D. discount price.
51. The steps and proper order for estimating EI cost using the gross profit method are as follows: A. determine COGA, estimate COGS, subtract COGS from COGA. B. determine COGA, estimate COGS, subtract COGA from COGS. C. estimate COGS, determine COGA, subtract COGA from COGS. D. estimate COGS, determine COGA, subtract COGS from COGA.
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Chapter 17 - Merchandise Inventory
52. An assumption necessary to the use of the Gross Profit method is that the A. Gross Profit amount is constant from period to period. B. inventory level remains constant. C. the rate of Gross Profit is constant from period to period. D. the Gross Profit percentage increases at the rate of inflation.
53. An increase above the initial retail price of merchandise is A. net profit. B. gross profit. C. markup. D. markon.
54. The retail method is a means of estimating A. selling price. B. beginning inventory cost. C. retail price of inventory. D. ending inventory cost.
55. The difference between the cost and the initial retail price of merchandise is A. markup. B. markon. C. markdown. D. market price.
56. Cost ratio is calculated by A. dividing merchandise available for sale at cost by merchandise available for sale at retail. B. dividing merchandise available for sale at retail by merchandise available for sale at cost. C. dividing net retail sales by the cost of the merchandise sold. D. dividing the cost of merchandise sold by net retail sales.
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Chapter 17 - Merchandise Inventory
57. If a business builds and sells yachts. The logical method for inventory costing is A. LIFO. B. average cost method. C. specific identification method. D. FIFO.
Short Answer Questions
58. Information about the Maxwell Company's inventory of one item during 2013 is given below.
Compute the cost of the ending inventory and cost of goods sold under each of the following methods. 1. Average cost method 2. First in, first out (FIFO) method 3. Last in, first out (LIFO) method
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Chapter 17 - Merchandise Inventory
59. The following data concerns selected inventory items.
Determine the amount to be reported as the inventory valuation at cost or market, whichever is lower, under each of the following methods. 1. Lower of cost or market for each item separately 2. Lower of total cost or total market 3. Lower of total cost or total market by department
60. On July 1, 2013, a fire destroyed the entire inventory of Stewart Clothes, a retail store. The accounting records that were saved showed that the firm's gross profit rate was 40 percent of net sales. During the period of January 1 to July 1, 2013, the store had net sales of $345,000 and net purchases of $325,000. On December 31, 2013, the inventory was $50,000. 1. What is the estimated cost of goods sold for the period? 2. What is the estimated ending (destroyed) inventory? 3. What is the estimated gross profit for the period?
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Chapter 17 - Merchandise Inventory
61. The June 1 inventory of the Kaufman Company had a cost of $8,000 and a retail value of $20,000. During June, merchandise was purchased for $36,000 and marked to sell for $60,000. June sales totaled $45,000. Use the retail method to compute the answers to the following questions. 1. What is the retail value of the ending inventory as of June 30? 2. What is the approximate cost of the ending inventory? 3. What is the cost of goods sold during June?
62. Duncan Industries' inventory of coats (Model XL) during 2013 is given below.
What is the cost of the ending inventory and the cost of goods sold? 1. Assume Duncan Industries utilizes the FIFO method 2. Assume Duncan Industries utilizes the LIFO method 3. Assume Duncan Industries utilizes the average cost method
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Chapter 17 - Merchandise Inventory
63. Alyse Designer Handbags had the following inventory figures for its Nicole Model during 2013 as shown below.
What is the cost of the ending inventory and the cost of goods sold? 1. Assume the company utilizes the FIFO method 2. Assume the company utilizes the LIFO method 3. Assume the company utilizes the average cost method
64. What is the specific identification method for valuing inventory? What types of businesses are likely to use this method? Why?
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Chapter 17 - Merchandise Inventory
65. Explain what taking a physical inventory is and why it is done.
66. For each of the following statements, determine which method of inventory valuation (FIFO or LIFO) it depicts. 1. ___________________ The item sold is assigned a cost. 2. ___________________ The ending inventory is higher under this method when costs are rising. 3. ___________________ The cost of goods sold is higher under this method when costs are rising. 4. ___________________ When prices are rising, this method results in higher net income. 5. ___________________ If this method is used for federal tax purposes, it must also be adopted for it financial accounting. 6. ___________________ This method is not accepted in some countries. 7. ___________________ When prices are rising, the average cost method will result in an ending inventory that is higher than which method?
67. Adams Company uses the specific identification method. At the end of the year, it had 24 units of its giant floating tricycles that were sold for use by tourists in the ocean or on large lakes. Explain how the physical count of inventory and the cost of ending inventory will be calculated.
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Chapter 17 - Merchandise Inventory
68. The following information concerns several of the inventory items at DC's.
Determine the amount of inventory to be reported on the financial statements using the lower of cost or market method of valuation under each of the following options. 1. Lower of cost or market for each item separately 2. Lower of total cost or total market 3. Lower of total cost or total market by department
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Chapter 17 - Merchandise Inventory
69. On July 1, a tornado destroyed the warehouse where The Brooks Boys Sports Equipment Company stored their inventory. The inventory was, for the most part, carried away by the force of the storm. The usual gross profit rate for the company was 30%. The beginning inventory of $220,000 was recorded on the prior year's financial reports. The net sales to date are known to be $886,450, and net purchases (including freight-in charges and purchases returns) were $580,000. Using the gross profit method of inventory valuation, determine the value of the inventory that was destroyed.
70. On June 29, Hurricane Moriah destroyed the warehouse where The Adams Bicycle Sales Company stored their inventory. The inventory was, for the most part, carried away by the force of the storm. The usual gross profit rate for the company was 45%. The beginning inventory of $120,000 was recorded on the prior year's financial reports. The net sales to date are known to be $474,500, and net purchases (including freight-in charges and purchases returns) were $325,000. Using the gross profit method of inventory valuation, determine the value of the inventory that was destroyed.
71. The October 1st inventory of the David Charles Company had a recorded cost of $19,500. Its retail value was $39,000. During the month of October, purchases in the amount of $30,320 (including freight of $320) were made and priced at retail for $67,000. Sales for the month of October amounted to $74,000. What is the October cost of goods sold and the ending inventory at cost and at retail?
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Chapter 17 - Merchandise Inventory
72. The November 1st inventory of the Ray Adams Company had a cost of $29,750. Its retail value was $48,000. During the month of November, purchases in the amount of $41,734 (including freight in of $234) were made and priced at retail for $79,650. Sales for the month of November amounted to $88,000. What is the November cost of goods sold and the ending inventory at cost and at retail?
73. The following information concerns several of the inventory items at DC's.
Determine the amount of inventory to be reported on the financial statements using the lower of cost or market method of valuation under each of the following options. 1. Lower of cost or market for each item separately 2. Lower of total cost or total market 3. Lower of total cost or total market by department
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Chapter 17 - Merchandise Inventory
74. Explain the following terms—markon, markup, and markdown.
75. What is inventory shrink? How may inventory shrink come about?
76. To safeguard its inventory, organizations implement various types of controls. List some general internal controls that may be in place in a business.
77. What is RFID? What is the benefit to RFID?
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Chapter 17 - Merchandise Inventory
78. Distinguish between periodic inventory, perpetual inventory, and physical inventory.
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Chapter 17 - Merchandise Inventory
Chapter 17 Merchandise Inventory Answer Key
True / False Questions
1. In a period of rising prices, the LIFO method of inventory valuation results in a lower reported net income than the FIFO method. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
2. The FIFO method of inventory valuation focuses on the balance sheet; the most current costs are in ending inventory. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
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Chapter 17 - Merchandise Inventory
3. The LIFO method of inventory valuation assigns the cost of the most recent purchases to the ending inventory. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
4. The use of the FIFO method of inventory valuation results in a matching of current inventory costs against current sales revenue. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
5. Inventory cannot be valued at the lower of cost or market if the inventory cost was determined using the FIFO methods. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 17-03 Compute inventory value under the lower of cost or market rule. Level: Easy Topic: Inventory Valuation and Control
6. Under the gross profit method of estimating inventory, the ending inventory is determined by subtracting the estimated cost of goods sold from the cost of goods available for sale. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 17-04 Estimate inventory cost using the gross profit method. Level: Easy Topic: Inventory Valuation and Control
17-22
Chapter 17 - Merchandise Inventory
7. Gross profit ratio is determined by dividing Net Sales by Gross Profit. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 17-04 Estimate inventory cost using the gross profit method. Level: Easy Topic: Inventory Valuation and Control
8. The average cost method of inventory valuation will always result in the lowest reported net income. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
9. Following the consistency principle, once a firm adopts a method of inventory valuation, it should use that method consistently from one period to the next. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 17-02 Compare the effects of different methods of inventory costing. Level: Easy Topic: Inventory Costing Methods
10. If a firm uses the FIFO method of inventory valuation for tax purposes, it must use the FIFO method for financial accounting. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 17-02 Compare the effects of different methods of inventory costing. Level: Easy Topic: Inventory Costing Methods
17-23
Chapter 17 - Merchandise Inventory
11. When the replacement cost of an item is below its original purchase cost, it is necessary to value the inventory at market price in order to reflect the lower current value in the firm's financial records. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 17-03 Compute inventory value under the lower of cost or market rule. Level: Easy Topic: Inventory Valuation and Control
12. The most conservative method of applying the lower of cost or market rule is to use the lower of total cost or total market by groups. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 17-03 Compute inventory value under the lower of cost or market rule. Level: Easy Topic: Inventory Valuation and Control
13. The fundamental assumption of the gross profit method of estimating inventory is that the rate of gross profit on sales is about the same from period to period. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 17-04 Estimate inventory cost using the gross profit method. Level: Easy Topic: Inventory Valuation and Control
17-24
Chapter 17 - Merchandise Inventory
14. Many retail stores take a periodic inventory at retail values, using the sales price marked on the merchandise. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 17-05 Estimate inventory cost using the retail method. Level: Easy Topic: Inventory Valuation and Control
15. Inventory valuation is very important in computing federal income tax because the value placed on the inventory determines the net income reported. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
16. A physical inventory should be taken at least annually to verify the goods on hand. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 17-05 Estimate inventory cost using the retail method. Level: Easy Topic: Inventory Valuation and Control
17. For internal control, unit figures used to compute the inventory should be verified through spot checks. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 17-05 Estimate inventory cost using the retail method. Level: Easy Topic: Inventory Valuation and Control
17-25
Chapter 17 - Merchandise Inventory
Fill in the Blank Questions
18. A price reduction below the original markon is ________________. markdown
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 17-05 Estimate inventory cost using the retail method. Learning Objective: 17-06 Define the accounting terms new to this chapter. Level: Easy Topic: Inventory Valuation and Control
19. The ________________ method of inventory costing must be used for financial accounting purposes if it is chosen for federal income tax purposes. LIFO
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 17-02 Compare the effects of different methods of inventory costing. Level: Easy Topic: Inventory Costing Methods
20. The price the business would have to pay to buy an item of inventory through usual channels in usual quantities is either market price or __________________ cost. replacement
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 17-03 Compute inventory value under the lower of cost or market rule. Learning Objective: 17-06 Define the accounting terms new to this chapter. Level: Easy Topic: Inventory Valuation and Control
17-26
Chapter 17 - Merchandise Inventory
21. Net Sales minus Gross Profit equals ___________________. Cost of Goods Sold
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 17-04 Estimate inventory cost using the gross profit method. Level: Easy Topic: Inventory Valuation and Control
22. The lower the ending inventory valuation, the ____________________ the reported net income. lower; smaller
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
23. A merchant who deals in one-of-a-kind items with large unit costs may account for inventory by the _________________________ method. specific identification
AACSB: Reflective Thinking AICPA BB: Industry Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
24. When the ____________________ method is used, the cost of the ending inventory is computed by using the cost of the latest purchases. FIFO
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
17-27
Chapter 17 - Merchandise Inventory
25. The ____________________ method of inventory valuation is a procedure developed for charging the current costs of goods against current sales prices. LIFO
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
26. When inventory is valued at the lower of cost or market, the accountant is applying the principle or convention called ___________________. conservatism
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 17-03 Compute inventory value under the lower of cost or market rule. Level: Easy Topic: Inventory Valuation and Control
27. The ____________________ method of estimating inventory requires the use of data about both cost and selling prices. retail
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 17-05 Estimate inventory cost using the retail method. Level: Easy Topic: Inventory Valuation and Control
17-28
Chapter 17 - Merchandise Inventory
28. The ____________________ method of estimating ending inventory involves estimating the cost of goods sold by applying a company's cost/sales ratio to its sales for the current period. gross profit
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 17-04 Estimate inventory cost using the gross profit method. Level: Easy Topic: Inventory Valuation and Control
29. In periods of rising prices, use of the ____________________ method of inventory valuation results in the lowest inventory cost on the balance sheet. LIFO
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 17-02 Compare the effects of different methods of inventory costing. Level: Easy Topic: Inventory Costing Methods
30. In the ____________________ method of inventory valuation, inventory cost is determined by multiplying the number of units in inventory by a unit cost, which is calculated by dividing the cost of goods available for sale by the units of merchandise available for sale. average cost
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Learning Objective: 17-06 Define the accounting terms new to this chapter. Level: Easy Topic: Accounting for Notes Payable Topic: Inventory Costing Methods Topic: Inventory Valuation and Control
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Chapter 17 - Merchandise Inventory
31. The _________________________ account is the one account that appears on both the balance sheet and the income statement. Merchandise Inventory
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
32. The lower the ending inventory valuation, the ____________________ the cost of goods sold. higher
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
Multiple Choice Questions
33. In periods of rising prices, the inventory valuation procedure that results in the highest net income is A. the lower of cost or market method. B. the LIFO method. C. the average cost method. D. the FIFO method.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 17-02 Compare the effects of different methods of inventory costing. Level: Easy Topic: Inventory Costing Methods
17-30
Chapter 17 - Merchandise Inventory
34. If other items remain the same, the larger the ending inventory valuation, the A. higher the cost of goods sold. B. higher the reported net income. C. lower the reported gross profit on sales. D. lower the reported net income.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
35. A firm that sells a single product had a beginning inventory of 4,000 units with a total cost of $28,000. Early in the year, 10,000 units were purchased at $9 each. Using FIFO, what is the value of the ending inventory of 3,000 units? A. $27,000 B. $24,000 C. $21,000 D. $36,000 27000 = 3000 x 9.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 17-02 Compare the effects of different methods of inventory costing. Level: Medium Topic: Inventory Costing Methods
17-31
Chapter 17 - Merchandise Inventory
36. A firm that sells a single product had a beginning inventory of 4,000 units with a total cost of $16,000. Early in the year, 8,000 units were purchased at $6 each. Using LIFO, what is the value of the ending inventory of 2,000 units? A. $12,000 B. $10,000 C. $8,000 D. $24,000 8000 = 2000 x (16000/4000).
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 17-02 Compare the effects of different methods of inventory costing. Level: Medium Topic: Inventory Costing Methods
37. Which of the following inventory costing procedures requires a physical count of merchandise a minimum of once a year at yearend? A. the retail method B. the average cost method C. the gross profit method D. the lower of cost or market method
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
17-32
Chapter 17 - Merchandise Inventory
38. The gross profit method of determining ending inventory cost A. can be used without taking a physical count of merchandise. B. provides accurate information about the number of units in inventory. C. requires that a firm keep inventory and purchases data at retail value as well as at cost. D. requires that the inventory be classified into groups of items of about the same rate of mark on.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 17-04 Estimate inventory cost using the gross profit method. Level: Easy Topic: Inventory Valuation and Control
39. The accountant for a company whose inventory was destroyed by fire determined from undamaged records that the cost of goods available for sale was $100,000 and the net sales were $80,000 up to the date of the fire. The accountant also determined that the company's normal gross profit rate is 40 percent of net sales. From this data, the accountant estimated the cost of the inventory destroyed by the fire to be A. $60,000. B. $52,000. C. $32,000. D. $20,000. $80,000 x .6 = $48,000 $100,000 - $48,000 = $52,000.
AACSB: Reflective Thinking AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 17-04 Estimate inventory cost using the gross profit method. Level: Medium Topic: Inventory Valuation and Control
17-33
Chapter 17 - Merchandise Inventory
40. The merchandise available for sale cost a company $90,000 and was marked to sell at a retail price of $125,000. Sales during the period totaled $80,000. If the retail method is used, the estimated cost of the ending inventory is A. $32,400. B. $12,600. C. $22,400. D. $45,000. 90000/125000 = 70%; 70% x 80000 = 57600; 90000 - 57600 = 32400.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 17-05 Estimate inventory cost using the retail method. Level: Medium Topic: Inventory Valuation and Control
41. The weighted average cost of an inventory item is calculated by A. dividing the sum of the unit cost on the purchase invoices by the number of units purchased. B. dividing the cost of goods available for sale by the number of units on the ending inventory. C. dividing the cost of goods available for sale by the number of units available during the period. D. dividing the cost of goods sold by the number of units available during the period.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
17-34
Chapter 17 - Merchandise Inventory
42. The modifying convention of conservatism requires that inventory be presented on the balance sheet at A. cost. B. market value. C. either cost or market value, whichever is lower. D. average cost during the period.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 17-03 Compute inventory value under the lower of cost or market rule. Level: Easy Topic: Inventory Valuation and Control
43. The cost of the earliest merchandise purchased is assigned to ending inventory when a company uses A. the LIFO method. B. the FIFO method. C. the average cost method. D. the lower of cost or market method.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
44. A matching of the most recent costs to revenue results from the use of A. the LIFO method. B. the FIFO method. C. the average cost method. D. the lower of cost or market method.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 17-02 Compare the effects of different methods of inventory costing. Level: Easy Topic: Inventory Costing Methods
17-35
Chapter 17 - Merchandise Inventory
45. The use of the FIFO method of inventory valuation A. results in a matching of current inventory costs against sales revenue. B. results in the most current costs in ending inventory. C. results in a lowest reported net income in a time of rising prices. D. results in a highest reported net income in a time of falling prices.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 17-02 Compare the effects of different methods of inventory costing. Level: Easy Topic: Inventory Costing Methods
46. The use of the LIFO method of inventory valuation A. assigns the cost of the most recent purchases to the ending inventory. B. results in the same valuation as the specific identification method in a time of rising prices. C. results in the lowest reported net income in a time of rising prices. D. results in the highest reported net income in a time of rising prices.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 17-02 Compare the effects of different methods of inventory costing. Level: Easy Topic: Inventory Costing Methods
47. The firm had a beginning inventory of 50 units with a unit cost of $10. Purchases during the year were as follows: March—50 units with a unit cost of $12; July—60 units with a unit cost of $15. If the average cost method is used, the value of the ending inventory of 45 units is A. $675. B. $563. C. $450. D. $555. 45 x (2000/160).
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Medium Topic: Inventory Costing Methods
17-36
Chapter 17 - Merchandise Inventory
48. Which of the following is NOT a way to apply the lower of cost or market rule? A. by item B. by size C. in total D. by group
AACSB: Reflective Thinking AICPA FN: Decision Making Bloom's: Understand Learning Objective: 17-03 Compute inventory value under the lower of cost or market rule. Learning Objective: 17-06 Define the accounting terms new to this chapter. Level: Easy Topic: Inventory Valuation and Control
49. The Lower of Cost or Market rule is based on which accounting principle? A. conservatism B. revenue recognition C. matching D. full disclosure
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 17-03 Compute inventory value under the lower of cost or market rule. Level: Easy Topic: Inventory Valuation and Control
50. The price a business would pay for its inventory is A. assessed value. B. sales price. C. replacement cost. D. discount price.
AACSB: Reflective Thinking AICPA BB: Industry Bloom's: Remember Learning Objective: 17-03 Compute inventory value under the lower of cost or market rule. Level: Easy Topic: Inventory Valuation and Control
17-37
Chapter 17 - Merchandise Inventory
51. The steps and proper order for estimating EI cost using the gross profit method are as follows: A. determine COGA, estimate COGS, subtract COGS from COGA. B. determine COGA, estimate COGS, subtract COGA from COGS. C. estimate COGS, determine COGA, subtract COGA from COGS. D. estimate COGS, determine COGA, subtract COGS from COGA.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 17-04 Estimate inventory cost using the gross profit method. Level: Easy Topic: Inventory Valuation and Control
52. An assumption necessary to the use of the Gross Profit method is that the A. Gross Profit amount is constant from period to period. B. inventory level remains constant. C. the rate of Gross Profit is constant from period to period. D. the Gross Profit percentage increases at the rate of inflation.
AACSB: Reflective Thinking AICPA BB: Industry Bloom's: Remember Learning Objective: 17-04 Estimate inventory cost using the gross profit method. Level: Medium Topic: Inventory Valuation and Control
53. An increase above the initial retail price of merchandise is A. net profit. B. gross profit. C. markup. D. markon.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 17-05 Estimate inventory cost using the retail method. Learning Objective: 17-06 Define the accounting terms new to this chapter. Level: Easy Topic: Inventory Valuation and Control
17-38
Chapter 17 - Merchandise Inventory
54. The retail method is a means of estimating A. selling price. B. beginning inventory cost. C. retail price of inventory. D. ending inventory cost.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 17-05 Estimate inventory cost using the retail method. Level: Easy Topic: Inventory Valuation and Control
55. The difference between the cost and the initial retail price of merchandise is A. markup. B. markon. C. markdown. D. market price.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 17-05 Estimate inventory cost using the retail method. Learning Objective: 17-06 Define the accounting terms new to this chapter. Level: Easy Topic: Inventory Valuation and Control
56. Cost ratio is calculated by A. dividing merchandise available for sale at cost by merchandise available for sale at retail. B. dividing merchandise available for sale at retail by merchandise available for sale at cost. C. dividing net retail sales by the cost of the merchandise sold. D. dividing the cost of merchandise sold by net retail sales.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 17-05 Estimate inventory cost using the retail method. Level: Easy Topic: Inventory Valuation and Control
17-39
Chapter 17 - Merchandise Inventory
57. If a business builds and sells yachts. The logical method for inventory costing is A. LIFO. B. average cost method. C. specific identification method. D. FIFO.
AACSB: Reflective Thinking AICPA FN: Measurement Bloom's: Remember Learning Objective: 17-03 Compute inventory value under the lower of cost or market rule. Learning Objective: 17-06 Define the accounting terms new to this chapter. Level: Easy Topic: Inventory Valuation and Control
17-40
Chapter 17 - Merchandise Inventory
Short Answer Questions
58. Information about the Maxwell Company's inventory of one item during 2013 is given below.
Compute the cost of the ending inventory and cost of goods sold under each of the following methods. 1. Average cost method 2. First in, first out (FIFO) method 3. Last in, first out (LIFO) method 1. End. Inv., $1,237.50 (55 x $22.50); Cost of Goods Sold, $5,512.50 2. End. Inv., $1,155.00 (55 x $21.00); Cost of Goods Sold, $5,595.00 3. End. Inv., $1,320.00 (55 x $24.00); Cost of Goods Sold, $5,430.00
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Medium Topic: Inventory Costing Methods
17-41
Chapter 17 - Merchandise Inventory
59. The following data concerns selected inventory items.
Determine the amount to be reported as the inventory valuation at cost or market, whichever is lower, under each of the following methods. 1. Lower of cost or market for each item separately 2. Lower of total cost or total market 3. Lower of total cost or total market by department 1. $3,941.25; 2. $4,023.25 (lower of total market); 3. $3,985.50 (Dept. A, lower of total cost, $1,637.50; Dept. B, lower of total market, $2,348.00)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 17-03 Compute inventory value under the lower of cost or market rule. Level: Medium Topic: Inventory Valuation and Control
17-42
Chapter 17 - Merchandise Inventory
60. On July 1, 2013, a fire destroyed the entire inventory of Stewart Clothes, a retail store. The accounting records that were saved showed that the firm's gross profit rate was 40 percent of net sales. During the period of January 1 to July 1, 2013, the store had net sales of $345,000 and net purchases of $325,000. On December 31, 2013, the inventory was $50,000. 1. What is the estimated cost of goods sold for the period? 2. What is the estimated ending (destroyed) inventory? 3. What is the estimated gross profit for the period? 1. $207,000; 2. $168,000; 3. $138,000 Feedback: COGS = 345000 x 60% = 207000. EI = 325000 - 207000 + 50000 = 168000. GP = 345000 - 207000 = 138000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 17-04 Estimate inventory cost using the gross profit method. Level: Medium Topic: Inventory Valuation and Control
61. The June 1 inventory of the Kaufman Company had a cost of $8,000 and a retail value of $20,000. During June, merchandise was purchased for $36,000 and marked to sell for $60,000. June sales totaled $45,000. Use the retail method to compute the answers to the following questions. 1. What is the retail value of the ending inventory as of June 30? 2. What is the approximate cost of the ending inventory? 3. What is the cost of goods sold during June? 1. $35,000; 2. $19,250 ($35,000 x 55%); 3. $24,750
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 17-05 Estimate inventory cost using the retail method. Level: Medium Topic: Inventory Valuation and Control
17-43
Chapter 17 - Merchandise Inventory
62. Duncan Industries' inventory of coats (Model XL) during 2013 is given below.
What is the cost of the ending inventory and the cost of goods sold? 1. Assume Duncan Industries utilizes the FIFO method 2. Assume Duncan Industries utilizes the LIFO method 3. Assume Duncan Industries utilizes the average cost method 1. (FIFO) EI: $280.00 = 4 x 70; COGS: 9380 = 9660 - 280 2. (LIFO) EI: $300.00 = 4 x 75; COGS: 9360 = 9660 - 300 3. (average cost) EI: $304.25 (Students may have $304 if they rounded.) = 4 x (9660/127); COGS: 9356 = 9660 - 304
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Medium Topic: Inventory Costing Methods
17-44
Chapter 17 - Merchandise Inventory
63. Alyse Designer Handbags had the following inventory figures for its Nicole Model during 2013 as shown below.
What is the cost of the ending inventory and the cost of goods sold? 1. Assume the company utilizes the FIFO method 2. Assume the company utilizes the LIFO method 3. Assume the company utilizes the average cost method 1. (FIFO) EI: $225.00 = 15 x 15; COGS: 1995 = 2220 - 225. 2. (LIFO) EI: $225.00 = 15 x 15; COGS: 1995 = 2220 - 225. 3. $226.53 (with no rounding until final calculation) or $226.50 (if per item number is rounded to nearest penny) (average cost method) = 15 x (2220/147); COGS: 1993.5 = 2220 226.5.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Medium Topic: Inventory Costing Methods
17-45
Chapter 17 - Merchandise Inventory
64. What is the specific identification method for valuing inventory? What types of businesses are likely to use this method? Why? The specific identification method is a method of inventory valuations based on the actual cost of each specific item of merchandise. Businesses that might use this method are those that sell high-priced or one-of-a-kind items. Art dealers, antique dealers, automobile dealers, boat dealers, or dealers of large equipment would be more likely to use the specific identification method as they may want to track inventory during the time they hold it and perhaps even after the items are sold. This method is not practical for items that are similar in nature and have a relatively small unit value as they are not easily separately identifiable.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Medium Topic: Inventory Costing Methods
65. Explain what taking a physical inventory is and why it is done. It is an actual count of the number of units of each type of good on hand in merchandise inventory. A physical inventory can be taken at any time during the year, but is always taken at yearend for the financial statements and income tax reporting. This physical count also discloses any differences between the actual amount of inventory and the inventory amount carried on the books (inventory shrink (shrinkage)). A physical inventory count at yearend is required by GAAP and for federal income tax purposes.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 17-02 Compare the effects of different methods of inventory costing. Level: Easy Topic: Inventory Costing Methods
17-46
Chapter 17 - Merchandise Inventory
66. For each of the following statements, determine which method of inventory valuation (FIFO or LIFO) it depicts. 1. ___________________ The item sold is assigned a cost. 2. ___________________ The ending inventory is higher under this method when costs are rising. 3. ___________________ The cost of goods sold is higher under this method when costs are rising. 4. ___________________ When prices are rising, this method results in higher net income. 5. ___________________ If this method is used for federal tax purposes, it must also be adopted for it financial accounting. 6. ___________________ This method is not accepted in some countries. 7. ___________________ When prices are rising, the average cost method will result in an ending inventory that is higher than which method? 1. FIFO, LIFO; 2. FIFO; 3. LIFO; 4. FIFO; 5. LIFO; 6. LIFO; 7. FIFO
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 17-02 Compare the effects of different methods of inventory costing. Level: Easy Topic: Inventory Costing Methods
67. Adams Company uses the specific identification method. At the end of the year, it had 24 units of its giant floating tricycles that were sold for use by tourists in the ocean or on large lakes. Explain how the physical count of inventory and the cost of ending inventory will be calculated. Each of the 24 units will be identified by its ID number, which will be on a tag attached to the item or electronically via the bar code for example. The cost of each will be taken and the total of these costs will comprise the ending inventory dollar amount.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Level: Easy Topic: Inventory Costing Methods
17-47
Chapter 17 - Merchandise Inventory
68. The following information concerns several of the inventory items at DC's.
Determine the amount of inventory to be reported on the financial statements using the lower of cost or market method of valuation under each of the following options. 1. Lower of cost or market for each item separately 2. Lower of total cost or total market 3. Lower of total cost or total market by department 1. $9,193 2. $9,253 3. $9,253
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 17-03 Compute inventory value under the lower of cost or market rule. Level: Medium Topic: Inventory Valuation and Control
17-48
Chapter 17 - Merchandise Inventory
69. On July 1, a tornado destroyed the warehouse where The Brooks Boys Sports Equipment Company stored their inventory. The inventory was, for the most part, carried away by the force of the storm. The usual gross profit rate for the company was 30%. The beginning inventory of $220,000 was recorded on the prior year's financial reports. The net sales to date are known to be $886,450, and net purchases (including freight-in charges and purchases returns) were $580,000. Using the gross profit method of inventory valuation, determine the value of the inventory that was destroyed. Estimated ending inventory is $179,485. If the usual gross profit rate is 30%, COGS is 70% or $620,515. COGA totaled $800,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 17-04 Estimate inventory cost using the gross profit method. Level: Hard Topic: Inventory Valuation and Control
70. On June 29, Hurricane Moriah destroyed the warehouse where The Adams Bicycle Sales Company stored their inventory. The inventory was, for the most part, carried away by the force of the storm. The usual gross profit rate for the company was 45%. The beginning inventory of $120,000 was recorded on the prior year's financial reports. The net sales to date are known to be $474,500, and net purchases (including freight-in charges and purchases returns) were $325,000. Using the gross profit method of inventory valuation, determine the value of the inventory that was destroyed. Estimated ending inventory is $184,025. If the usual gross profit rate is 45%, COGS is 55% or $260,975. COGA totaled $495,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 17-04 Estimate inventory cost using the gross profit method. Level: Hard Topic: Inventory Valuation and Control
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Chapter 17 - Merchandise Inventory
71. The October 1st inventory of the David Charles Company had a recorded cost of $19,500. Its retail value was $39,000. During the month of October, purchases in the amount of $30,320 (including freight of $320) were made and priced at retail for $67,000. Sales for the month of October amounted to $74,000. What is the October cost of goods sold and the ending inventory at cost and at retail?
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 17-05 Estimate inventory cost using the retail method. Level: Medium Topic: Inventory Valuation and Control
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Chapter 17 - Merchandise Inventory
72. The November 1st inventory of the Ray Adams Company had a cost of $29,750. Its retail value was $48,000. During the month of November, purchases in the amount of $41,734 (including freight in of $234) were made and priced at retail for $79,650. Sales for the month of November amounted to $88,000. What is the November cost of goods sold and the ending inventory at cost and at retail?
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 17-05 Estimate inventory cost using the retail method. Level: Medium Topic: Inventory Valuation and Control
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Chapter 17 - Merchandise Inventory
73. The following information concerns several of the inventory items at DC's.
Determine the amount of inventory to be reported on the financial statements using the lower of cost or market method of valuation under each of the following options. 1. Lower of cost or market for each item separately 2. Lower of total cost or total market 3. Lower of total cost or total market by department 1. $8,670.75 2. $8,707.75 3. $8,707.75
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 17-03 Compute inventory value under the lower of cost or market rule. Level: Medium Topic: Inventory Valuation and Control
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Chapter 17 - Merchandise Inventory
74. Explain the following terms—markon, markup, and markdown. Markon is the difference between the original cost of an item and the initial retail price. Markup is a price increase above the original markon. Markdown is a reduction in price below the original markon.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 17-05 Estimate inventory cost using the retail method. Learning Objective: 17-06 Define the accounting terms new to this chapter. Level: Easy Topic: Inventory Valuation and Control
75. What is inventory shrink? How may inventory shrink come about? Shrink is the difference between the recorded amount of inventory in the financial records and the amount determined in a physical inventory determined during a count. Shrink may be due to theft, loss, or improper record keeping.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 17-06 Define the accounting terms new to this chapter. Level: Medium Topic: Inventory Valuation and Control
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Chapter 17 - Merchandise Inventory
76. To safeguard its inventory, organizations implement various types of controls. List some general internal controls that may be in place in a business. Inventory controls include: Limiting access to inventory Requiring documentation (written authority) before releasing inventory from a warehouse Taking a physical count of inventory Conducting spot checks to verify the means by which inventory is counted Conducting spot checks to verify the inventory item costs Having an independent auditor observe the inventory count
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 17-05 Estimate inventory cost using the retail method. Level: Hard Topic: Inventory Valuation and Control
77. What is RFID? What is the benefit to RFID? RFID stands for radio frequency identification, a "passive" electronic tag that enables a company to quickly determine the location of the merchandise (in the warehouse or the floor of the store). The benefit to using RFID is in the cost savings as it eliminates or at least greatly reduces the costs of materials handling for inventory count and control.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 17-05 Estimate inventory cost using the retail method. Level: Hard Topic: Inventory Valuation and Control
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Chapter 17 - Merchandise Inventory
78. Distinguish between periodic inventory, perpetual inventory, and physical inventory. Periodic inventory is based on the actual count done at yearend. The Merchandise Inventory account is adjusted at yearend to reflect the amount of the actual count. Perpetual inventory is based on a running count made within the company on a continual basis. There are various means of keeping track of the items in inventory. When an actual count is made at yearend, the balance in the Merchandise Inventory account is either verified or adjusted for shrinkage. Physical inventory is an actual count of the number of items of each type on hand at the time the count is made—usually at yearend.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 17-01 Compute inventory cost by applying four commonly used costing methods. Learning Objective: 17-06 Define the accounting terms new to this chapter. Level: Medium Topic: Inventory Costing Methods Topic: Inventory Valuation and Control
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Chapter 18 - Property, Plant, and Equipment
Chapter 18 Property, Plant, and Equipment True / False Questions
1. Land purchased for a future building site or as an investment would not be shown in the Property, Plant, and Equipment section of the balance sheet. True False
2. The recorded cost of an asset should include both the net invoice price and all transportation and installation costs. True False
3. The cost of land is not depreciated. True False
4. Use of the sum-of-the-years'-digits method of depreciation results in lower depreciation charges in the early years of an asset's life and higher charges in the later years. True False
5. The sale of a depreciable asset for an amount less than its cost always requires the recognition of a loss in the financial records of the company. True False
6. For financial accounting purposes, when an asset is traded in for a similar asset, a gain is reported if the trade-in allowance exceeds the book value of the asset traded in. True False
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Chapter 18 - Property, Plant, and Equipment
7. The acquisition cost of an intangible asset should be charged to expense over the shorter of its legal or useful life. True False
8. Patents and copyrights are intangible assets. True False
9. Accumulated Depreciation is classified as a contra asset account. True False
10. Depletion is the name given to the periodic allocation of the costs of assets created by human effort. True False
11. The book value of an asset is usually the same as the fair market value of the asset. True False
12. The salvage value is the value that the asset is expected to have at the end of its useful life. True False
13. When the units-of-output method is used to compute depreciation, the useful life of an asset is the number of units of work the asset will perform. True False
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Chapter 18 - Property, Plant, and Equipment
14. The modified accelerated cost recovery system (MACRS) is acceptable for financial accounting purposes because it matches the costs of assets with the revenues produced by those assets. True False
15. The adjusting entry to record depletion for the period includes a credit to the Depletion Expense account. True False
16. The balance of an Accumulated Depletion account is subtracted from the related natural resource account to determine the book value of the natural resource. True False
17. When an asset is sold, the first thing an accountant must do is record the depreciation to the date of sale. True False
18. The entry to record the amortization of acquisition cost of an intangible asset includes a credit directly to the intangible asset account. True False
19. Each year intangibles are assessed to estimate the value which is compared to the existing book value in order to determine if impairment must be recorded. True False
20. When an asset is traded for a similar asset, if the trade-in allowed is less than the book value of the asset, the loss is not recognized for financial accounting purposes. True False
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Chapter 18 - Property, Plant, and Equipment
Fill in the Blank Questions
21. Patents, trademarks, and copyrights are examples of ____________________ assets. ________________________________________
22. The difference between the acquisition cost of an asset and its accumulated depreciation is called the ___________________. ________________________________________
23. The term used to describe the periodic transfer of the acquisition cost to expense when minerals or other natural resources are physically removed during production is ___________________. ________________________________________
24. The term used to describe the process of allocating the acquisition cost of an intangible asset to expense during its estimated useful life is ___________________. ________________________________________
25. To calculate declining-balance depreciation, it is necessary to multiply the ____________________ of an asset by an appropriate rate. ________________________________________
26. If a depreciable asset is sold for an amount that is lower than the asset's book value, a(n) ____________________ is recognized. ________________________________________
27. The acquisition cost of an intangible asset is amortized over the shorter of its legal life or ____________________ life. ________________________________________
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Chapter 18 - Property, Plant, and Equipment
28. When the sum-of-the-years'-digits method is used to depreciate an asset with a four-year life, the depreciation expense for the fourth year is computed by multiplying the difference between the cost and the salvage value by the fraction ___________________. ________________________________________
29. The normal balance of Accumulated Depreciation is a(n) ___________________. ________________________________________
30. The declining-balance method and the sum-of-the-years'-digits method are referred to as ____________________ methods of depreciation. ________________________________________
31. A company uses the units-of-output method of computing depreciation on its fleet of cars. A car that costs $26,000 is expected to have a useful life of 75,000 miles and an expected salvage value of $2,000 at the end of its useful life. The rate for each mile is ___________________. ________________________________________
32. A company uses the units-of-output method of computing depreciation on its fleet of cars. A car that costs $37,000 is expected to have a useful life of 120,000 miles and an expected salvage value of $1,000 at the end of its useful life. The rate for each mile is ___________________. ________________________________________
33. In determining the impairment of a long-term asset, an accountant applies the _________________ test to compare the asset's net book value with estimated cash flows from the asset's future use. ________________________________________
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Chapter 18 - Property, Plant, and Equipment
34. The Modified Accelerated Cost Recovery System (MACRS) is required for ______________ income tax purposes. ________________________________________
35. When an asset is acquired by trading in an asset already owned in exchange for the new one, the amount received on the trade-in is called the ______________. ________________________________________
36. If the property used in a business has physical substance and is not real estate it is _____________ property. ________________________________________
Multiple Choice Questions
37. Which method of depreciation is seldom, if ever, used for financial accounting purposes? A. the modified accelerated cost recovery system (MACRS) B. the sum-of-the-years'-digits method C. the declining-balance method D. the straight-line method
38. A firm purchases an asset for $50,000 and estimates that it will have a useful life of five years and a salvage value of $5,000. Under the double-declining-balance method, the depreciation expense for the first year of the asset's useful life is A. $9,000. B. $18,000. C. $10,000. D. $20,000.
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Chapter 18 - Property, Plant, and Equipment
39. A firm purchases an asset for $50,000 and estimates that it will have a useful life of five years and a salvage value of $5,000. Under the straight-line method, the depreciation expense for the first year of the asset's useful life is A. $9,000. B. $18,000. C. $10,000. D. $20,000.
40. A firm purchases an asset for $50,000 and estimates that it will have a useful life of five years and a salvage value of $5,000. Under the straight-line method, the balance in the accumulated deprecation account, after the second year, will be A. $9,000. B. $18,000. C. $10,000. D. $20,000.
41. The entry to record the sale of equipment used in a business may include a debit to A. the Equipment account. B. the Gain on Sale of Equipment account. C. the Accumulated Depreciation—Equipment account. D. Depreciation Expense account.
42. The method of depreciation that results in the same amount of depreciation expense each year is the A. units-of-output method. B. straight-line method. C. sum-of-the-years'-digits method. D. declining-balance method.
43. The book value of an asset is A. the market value of the asset. B. the portion of the asset's cost that has not yet been charged to expense. C. the acquisition cost shown in the asset account less the estimated salvage value. D. the replacement cost of the asset.
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Chapter 18 - Property, Plant, and Equipment
44. An asset that cost $14,000 was sold for $9,000 cash. Accumulated depreciation on the asset was $7,000. The entry to record this transaction includes the recognition of A. a gain of $2,000. B. a loss of $5,000. C. neither a gain nor a loss. D. a loss of $2,000.
45. An asset that cost $25,000 was sold for $9,000 cash. Accumulated depreciation on the asset was $16,000. The entry to record this transaction includes the recognition of A. a gain of $9,000. B. a loss of $7,000. C. neither a gain nor a loss. D. a loss of $2,000.
46. An asset that cost $25,000 was sold for $8,000 cash. Accumulated depreciation on the asset was $16,000. The entry to record this transaction includes the recognition of A. a gain of $8,000. B. a loss of $1,000. C. neither a gain nor a loss. D. a gain of $1,000.
47. Assume that a business trades in an old cash register for a new one. Under the income tax method, A. a gain may be recognized, but a loss cannot be recorded. B. the cost of the new asset is recorded as the cash paid for the new asset. C. the asset account is debited for the difference between the original cost of the old asset and the fair market value of the new asset. D. the cost of the new asset is recorded as the book value of the old asset plus the cash amount paid or to be paid.
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Chapter 18 - Property, Plant, and Equipment
48. Equipment that cost $20,000 was sold for $12,000 cash. Accumulated depreciation on the asset was $14,000. The entry to record the sale includes a credit to the Equipment account for A. $6,000. B. $12,000. C. $20,000. D. $14,000.
49. The cost of an intangible asset A. should be immediately charged to expense if the cost was incurred to develop the intangible asset. B. should be immediately charged to expense whether the intangible asset was developed internally or purchased. C. should be recorded as an asset whose cost, like the cost of land, will not be allocated to expense. D. should be charged to expense over the life of the intangible asset.
50. A company purchased equipment for $16,000 cash. In addition, the company paid $1,000 to have the equipment delivered and $500 to have it installed. The cost of this asset for financial accounting purposes is A. $16,000. B. $17,000. C. $17,500. D. $16,500.
51. An example of real property is A. machinery. B. factory equipment. C. computer equipment. D. buildings.
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Chapter 18 - Property, Plant, and Equipment
52. The allocation of the costs of natural resources, such as minerals, to the units produced is referred to as A. depreciation. B. depletion. C. amortization. D. salvage value.
53. When computing depreciation, the salvage value should be ignored if a company uses A. the units-of-output method. B. the sum-of-the-years'-digits method. C. the declining-balance method. D. the straight-line method.
54. The amount of a long-term asset's impairment is A. the difference between the asset's current market value and historical cost. B. the estimated net cash flows from the asset's future use less its accumulated depreciation. C. the current market value of the asset. D. the amount by which the asset's book value exceeds its market value.
55. Dom's Delivery purchased a van for $32,000. The transportation charges were $400, sales tax was $2,240, and the license cost $250. Special shelving was installed in the van for $4,300. In addition, Dom had the company name painted on the doors. This cost the company $1,250. The total cost of the van to record in the proper asset account is A. $40,190. B. $40,440. C. $38,940. D. $39,190.
56. Which of the following is NOT a class under MACRS for personal property? A. 5 year class B. 7 year class C. 10 year class D. 27.5 year class
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Chapter 18 - Property, Plant, and Equipment
57. Under MACRS, the highest percent—resulting in the highest deprecation expense— occurs during which year? A. first B. second C. third D. fourth
58. Financial accounting rules (GAAP) and federal income tax rules differ for handling depreciation on the trade-in of an asset. Which of the following is correct?
A. Option A. B. Option B. C. Option C. D. Option D.
59. Which of the following abides by the principle of conservatism regarding trade-ins? A. recording only the loss B. recording only the gain C. recording both the loss and the gain D. recording neither the loss nor the gain
60. For federal income tax purposes, the depletion expense deducted from income is the larger of cost depletion or ___________. A. amount per table provided with forms B. percentage depletion C. units-of-production times the calculated rate per unit D. number of units extracted times the calculated rate per unit
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Chapter 18 - Property, Plant, and Equipment
61. The process by which the cost of natural resources extracted are allocated is A. depreciation. B. amortization. C. depletion. D. evaluation.
62. All of the following refer to the handling of a decline in value of property, plant, and equipment except A. depreciation. B. impairment. C. realization principle. D. conservatism constraint.
63. The steps in the process of determining an impairment loss in their proper order are A. apply the recoverability test, review circumstances that suggest impairment, compute the amount of the impairment. B. apply the recoverability test, review circumstances that suggest impairment, record the amount of the impairment. C. review circumstances that suggest impairment, apply the recoverability test, and compute the amount of the impairment. D. review circumstances that suggest impairment, apply the recoverability test, record the amount of the impairment.
64. Intangible assets may be purchased or developed. If developed, they are categorized as Research and Development and A. depreciated over their useful life. B. amortized over their useful life. C. depleted over their useful life. D. expensed.
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Chapter 18 - Property, Plant, and Equipment
65. Amortization is the periodic transfer of an intangible's cost to expense done on a A. straight-line or unit-of-production basis. B. straight-line or sum-of-the years basis. C. declining basis or percentage depletion basis. D. percentage depletion or straight-line basis.
Short Answer Questions
66. On January 2, 2013, the Hanover Company purchased some office equipment for $20,000. The equipment is expected to have a useful life of five years and a salvage value of $2,000. Prepare a schedule showing the annual depreciation for each of the first three years of the asset's life under the straight-line method, the double-declining-balance method, and the sumof-the-years'-digits method.
67. On January 2, 2013, the Unit Manufacturing Company purchased manufacturing equipment for $62,000. The equipment is expected to have a useful life of six years and a salvage value of $2,000. Prepare a schedule showing the annual depreciation for each of the first three years of the asset's life under the straight-line method, the double-declining-balance method, and the sum-of-the-years'-digits method.
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Chapter 18 - Property, Plant, and Equipment
68. On January 3, 2013, the Soloman Toy Company purchased a machine for $24,000. The machine is expected to produce 200,000 units during its useful life of five years and have a salvage value of $2,000 at the end of that period. The machine produced 41,000 units in 2013, 38,000 units in 2014, and 40,000 units in 2015. Prepare a schedule showing the annual depreciation for 2013, 2014, and 2015 under the straight-line method and the units-of-output method.
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Chapter 18 - Property, Plant, and Equipment
69. Modern Products Company purchased new packaging equipment for $245,000 on January 1, 2013. The equipment is expected to be used for 6 years, or 60,000 operating hours. It has an estimated salvage value of $5,000. The equipment was used for 10,000 hours in 2013, 15,000 hours in 2014, and 12,000 hours in 2015. Compute annual depreciation expense for the first three years, using the straight-line method, the double-declining balance method, and the units of output method.
70. In 2013 a mining company paid $150,000 for mining rights. It is estimated that a total of 200,000 tons of ore are available to be extracted. During 2013, 18,000 tons of ore were mined. What is the amount of Depletion Expense recorded in the adjusting entry for 2013?
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Chapter 18 - Property, Plant, and Equipment
71. In 2013 Lucky Mining Company paid $800,000 for mining rights. It is estimated that a total of 400,000 kilograms of ore are available to be extracted. During 2013, 60,000 tons of ore were mined. What is the amount of Depletion Expense recorded in the adjusting entry for 2013?
72. Modern Products Company purchased new packaging equipment for $245,000 on January 1, 2013. The equipment is expected to be used for 6 years, or 60,000 operating hours. It has an estimated salvage value of $5,000. The equipment was used for 10,000 hours in 2013, 15,000 hours in 2014, and 12,000 hours in 2015. Compute annual depreciation expense for the first three years, using the straight-line method, the double-declining balance method, and the units of output method.
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Chapter 18 - Property, Plant, and Equipment
73. Selected transactions of the Harrel Company are listed below. The company uses the straight-line method of depreciation. Record the transactions on page 9 of a general journal. Omit descriptions.
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Chapter 18 - Property, Plant, and Equipment
74. On, January 2, 2013, Rubble Sand and Gravel Company purchased equipment for $77,000. The equipment was to be used for five years and had a $2,000 estimated residual value. On January 2, 2013, equipment was sold for $30,000. Record the transactions on page 9 of a general journal. Omit descriptions.
75. On, January 2, 2013, Rubble Sand and Gravel Company purchased equipment for $77,000. The equipment was to be used for five years and had a $2,000 estimated residual value. On January 2, 2013, equipment was sold for $35,000. Record the transactions on page 9 of a general journal. Omit descriptions.
76. MPG Industries purchased a new printing press on January 2, 2013 for a cost of $245,000. Transportation costs to have it delivered were $734. The floor had to have new supports because of the weight of the press. The new supports cost $2,540, which included installation. After the press was in place, two employees took training classes to learn how to use the press at a cost of $1,600. The Equipment account is debited for what amount?
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Chapter 18 - Property, Plant, and Equipment
77. DJG Corporation purchased land in order to build new corporate headquarters for a purchase price of $758,000. The lawyers charged $2,500 to handle the legal aspects of the purchase. Closing costs paid by DJG amounted to $15,160. There was an old factory and warehouse on the property that cost DJG $7,500 to have removed. In addition, CSB Construction charged the corporation $1,800 to grade the property to ensure proper drainage and an additional $15,800 build a drive, parking lot, and walkways. What amount should be recorded as land? What other account(s) should be increased and for what amount(s)?
ARB Company purchased several pieces of equipment on January 2, 2013. Office Furniture cost the company $16,000, has an estimated useful life of ten years, at which time they expect to sell it for a total of $500. Office Equipment was also purchased for a total of $10,750 and has an estimated useful life of five years. They don't expect it to have any residual value at the end of that time.
78. Using the information shown, write the journal entry for the purchase of the Office Furniture assuming it was purchased on credit by signing a note and the journal entry for the Office Equipment purchase assuming that a check was written for it.
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Chapter 18 - Property, Plant, and Equipment
79. Using the information shown, calculate the depreciation for 2013, 2014, and 2015 if ARB Company uses the straight-line method. Complete the journal entry for the depreciation expense for 2013.
80. Using the information shown, calculate the depreciation for 2013, 2014, and 2015 under the double-declining-balance method (DDB).
81. Using the information shown, calculate the depreciation for 2013, 2014, and 2015 using the Sum-of-the-Years'-Digits Method. (Round to the nearest whole dollar.)
82. Define intangible assets. List several examples of intangible assets. How are intangible assets handled for financial reporting if their lives can be estimated? How are they handled for financial reporting if their lives cannot be estimated?
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Chapter 18 - Property, Plant, and Equipment
83. Explain MACRS by creating a list of its characteristics. Include the type of depreciation method it is, when it is required, how property is classified, etc.
84. ASB Ceramics purchased equipment used in the business three years ago for $32,000. The accumulated depreciation account related to the equipment asset account had a balance of $15,000. The equipment had an estimated salvage (residual) value of $2,000 and had an estimated life of six years. A full year's depreciation was taken the first year. ASB uses the straight-line depreciation method. All depreciation is usually recorded at yearend. The company sold the equipment in exchange for a promissory note on July 1 of the current year for $13,000. Record the appropriate entries necessary.
85. JRB Preschool purchased a van used in the business three years ago for $36,500. The accumulated depreciation account related to the equipment asset account had a balance of $18,000. The equipment had an estimated salvage (residual) value of $6,500 and had an estimated life of five years. A full year's depreciation was taken the first year. JRB uses the straight-line depreciation method. All depreciation is usually recorded at yearend. The company sold the equipment in exchange for a promissory note on July 1 of the current year for $12,000. Record the appropriate entries necessary.
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Chapter 18 - Property, Plant, and Equipment
86. Trade-ins are treated as sales of assets for accounting purposes. Explain the difference in treatment when the trade-in of an asset results in a gain and the treatment when the trade-in of an asset results in a loss.
87. C C Coal Company purchased the coal rights in an area for $4,050,000. They estimated that the area contained 9,000,000 tons of coal. The first year of operations in the area yielded 110,000 tons of coal. What is the depletion cost per ton of coal? What is the depletion expense for this first year?
88. Cullen's Catering owns a delivery van which it depreciates applying the units-of-output method (units-of-production method). The original cost of the van was $44,000. When it was purchased in July of 2013, it was estimated that it would be driven for 125,000 miles over four years and then sold for an expected salvage value of $4,500. During 2013 the van was driven 17,230 miles. What is the depreciation expense for 2013? (Round final answer to the nearest whole dollar.)
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Chapter 18 - Property, Plant, and Equipment
Ryadom Industries has several assets with book values that exceed their fair market values. At the end of the year (December 31, 2013), management at Ryadom reviewed the circumstances around several of its assets during the current year and determined that they were impaired. Each of the assets reviewed has a book value (carrying value) that exceeds its fair market value. The accountant at Ryadom applied the recoverability test to each. The first item is a Mixer that combines materials for a product that can now be made more efficiently due to new technology. The new mixer can produce seven products for every two that the Mixer Ryadom currently uses. This reduces Ryadom's ability to compete with companies who have invested in the newly developed mixers. In addition, the Mixer now has a market value of zero. The Mixer cost $235,000, had an original residual of $35,000 and an estimated life of ten years. Ryadom uses straight-line depreciation for its equipment. The Accumulated Depreciation for the Mixer is $120,000. The projected cash flows generated by the Mixer are $50,000 over the next four years. The second impaired asset is one of its facilities at a location that now cannot transport its product due to the closing of a rail line. Because the product cannot be transported given the present dilemma, the estimated future revenues generated by this facility are $30,000—the amount for which it is estimated that the facility can be sold. The facility buildings have a new value of $24,000 and the land has an unchanged estimated value of $7,000. The estimated remaining life of the facility is unchanged. The facility would require a large investment in order to accommodate trucks to pick up and transport the product or to deliver materials. This additional investment is not merited. Therefore, Ryadom plans to close and hopefully sell this facility. The facility has total recorded costs of $2,500,000 and its related accumulated depreciation account totals $1,800,000 (residual value was $100,000, estimated life was 8 years and straight-line depreciation was used). If the facility is not sold within the next two years, it will be demolished. It will be depreciated using the straight-line method assuming a zero residual value at that time.
89. Using the information shown, record the journal entries to record the amount of the impairment for these two situations.
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Chapter 18 - Property, Plant, and Equipment
90. A. Using the information shown, record the journal entry for the sale of the facility for $26,450. Assume that the sale took place on July 1, 2013, six months after the facility was written down. Record the journal entry made to update the books prior to the sale. B. In addition, assume that the new technology that made the Mixer owned by the company has been determined to environmental unsound and has been called off the market. The estimated revenues generated by the Mixer are recalculated to a total of $150,000 over the next four years. Explain what Ryadom Industries must do regarding its asset accounts regarding this turn of events.
91. C & T Company purchased a company that produced bottled water with fruit juice additives. The brand name for these products, Fruit Options, was well known and had a wellestablished customer base. At the time of purchase, January 2 of the current year, C & T valued this brand name at $250,000. The life of this intangible asset cannot be determined. However, it was assessed at the end of the year at the purchase price. The patent for the unique processing of the fruit juices had a remaining life of 8 years and an amount of $4,800 was recorded on the books for it. Prepare the journal entries for the amortization of these items at C & T's yearend, June 30.
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Chapter 18 - Property, Plant, and Equipment
Chapter 18 Property, Plant, and Equipment Answer Key
True / False Questions
1. Land purchased for a future building site or as an investment would not be shown in the Property, Plant, and Equipment section of the balance sheet. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 18-01 Determine the amount to record as an asset's cost. Level: Easy Topic: Acquisition and Depreciation
2. The recorded cost of an asset should include both the net invoice price and all transportation and installation costs. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 18-01 Determine the amount to record as an asset's cost. Level: Easy Topic: Acquisition and Depreciation
3. The cost of land is not depreciated. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 18-01 Determine the amount to record as an asset's cost. Level: Easy Topic: Acquisition and Depreciation
18-25
Chapter 18 - Property, Plant, and Equipment
4. Use of the sum-of-the-years'-digits method of depreciation results in lower depreciation charges in the early years of an asset's life and higher charges in the later years. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Easy Topic: Acquisition and Depreciation
5. The sale of a depreciable asset for an amount less than its cost always requires the recognition of a loss in the financial records of the company. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 18-04 Record sales of plant and equipment. Level: Easy Topic: Disposition of Assets
6. For financial accounting purposes, when an asset is traded in for a similar asset, a gain is reported if the trade-in allowance exceeds the book value of the asset traded in. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 18-05 Record asset trade-ins using financial accounting rules and income tax requirements. Level: Easy Topic: Disposition of Assets
7. The acquisition cost of an intangible asset should be charged to expense over the shorter of its legal or useful life. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 18-07 Recognize asset impairment and understand the general concepts of accounting for impairment. Level: Easy Topic: Special Topics in Long-Term Assets
18-26
Chapter 18 - Property, Plant, and Equipment
8. Patents and copyrights are intangible assets. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 18-07 Recognize asset impairment and understand the general concepts of accounting for impairment. Learning Objective: 18-09 Define the accounting terms new to this chapter. Level: Easy Topic: Special Topics in Long-Term Assets
9. Accumulated Depreciation is classified as a contra asset account. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Easy Topic: Acquisition and Depreciation
10. Depletion is the name given to the periodic allocation of the costs of assets created by human effort. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 18-06 Compute and record depletion of natural resources. Level: Easy Topic: Special Topics in Long-Term Assets
11. The book value of an asset is usually the same as the fair market value of the asset. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Easy Topic: Acquisition and Depreciation
18-27
Chapter 18 - Property, Plant, and Equipment
12. The salvage value is the value that the asset is expected to have at the end of its useful life. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Learning Objective: 18-09 Define the accounting terms new to this chapter. Level: Easy Topic: Acquisition and Depreciation Topic: Special Topics in Long-Term Assets
13. When the units-of-output method is used to compute depreciation, the useful life of an asset is the number of units of work the asset will perform. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Easy Topic: Acquisition and Depreciation
14. The modified accelerated cost recovery system (MACRS) is acceptable for financial accounting purposes because it matches the costs of assets with the revenues produced by those assets. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 18-03 Apply the Modified Accelerated Cost Recovery System (MACRS) for federal income tax purposes. Level: Easy Topic: Acquisition and Depreciation
18-28
Chapter 18 - Property, Plant, and Equipment
15. The adjusting entry to record depletion for the period includes a credit to the Depletion Expense account. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 18-06 Compute and record depletion of natural resources. Level: Easy Topic: Special Topics in Long-Term Assets
16. The balance of an Accumulated Depletion account is subtracted from the related natural resource account to determine the book value of the natural resource. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 18-06 Compute and record depletion of natural resources. Level: Easy Topic: Special Topics in Long-Term Assets
17. When an asset is sold, the first thing an accountant must do is record the depreciation to the date of sale. TRUE
AACSB: Reflective Thinking AICPA FN: Reporting Bloom's: Understand Learning Objective: 18-04 Record sales of plant and equipment. Level: Easy Topic: Disposition of Assets
18. The entry to record the amortization of acquisition cost of an intangible asset includes a credit directly to the intangible asset account. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 18-07 Recognize asset impairment and understand the general concepts of accounting for impairment. Level: Easy Topic: Special Topics in Long-Term Assets
18-29
Chapter 18 - Property, Plant, and Equipment
19. Each year intangibles are assessed to estimate the value which is compared to the existing book value in order to determine if impairment must be recorded. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 18-08 Compute and record amortization and impairment of intangible assets. Level: Easy Topic: Special Topics in Long-Term Assets
20. When an asset is traded for a similar asset, if the trade-in allowed is less than the book value of the asset, the loss is not recognized for financial accounting purposes. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 18-05 Record asset trade-ins using financial accounting rules and income tax requirements. Level: Easy Topic: Disposition of Assets
Fill in the Blank Questions
21. Patents, trademarks, and copyrights are examples of ____________________ assets. intangible
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 18-07 Recognize asset impairment and understand the general concepts of accounting for impairment. Learning Objective: 18-09 Define the accounting terms new to this chapter. Level: Easy Topic: Special Topics in Long-Term Assets
18-30
Chapter 18 - Property, Plant, and Equipment
22. The difference between the acquisition cost of an asset and its accumulated depreciation is called the ___________________. book value
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Easy Topic: Acquisition and Depreciation
23. The term used to describe the periodic transfer of the acquisition cost to expense when minerals or other natural resources are physically removed during production is ___________________. depletion
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 18-06 Compute and record depletion of natural resources. Learning Objective: 18-09 Define the accounting terms new to this chapter. Level: Easy Topic: Special Topics in Long-Term Assets
24. The term used to describe the process of allocating the acquisition cost of an intangible asset to expense during its estimated useful life is ___________________. amortization
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 18-08 Compute and record amortization and impairment of intangible assets. Level: Easy Topic: Special Topics in Long-Term Assets
18-31
Chapter 18 - Property, Plant, and Equipment
25. To calculate declining-balance depreciation, it is necessary to multiply the ____________________ of an asset by an appropriate rate. book value, cost less accumulated depreciation
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Easy Topic: Acquisition and Depreciation
26. If a depreciable asset is sold for an amount that is lower than the asset's book value, a(n) ____________________ is recognized. loss
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 18-04 Record sales of plant and equipment. Level: Easy Topic: Disposition of Assets
27. The acquisition cost of an intangible asset is amortized over the shorter of its legal life or ____________________ life. economic; useful
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 18-07 Recognize asset impairment and understand the general concepts of accounting for impairment. Level: Easy Topic: Special Topics in Long-Term Assets
18-32
Chapter 18 - Property, Plant, and Equipment
28. When the sum-of-the-years'-digits method is used to depreciate an asset with a four-year life, the depreciation expense for the fourth year is computed by multiplying the difference between the cost and the salvage value by the fraction ___________________. 1/10
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Medium Topic: Acquisition and Depreciation
29. The normal balance of Accumulated Depreciation is a(n) ___________________. credit
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Easy Topic: Acquisition and Depreciation
30. The declining-balance method and the sum-of-the-years'-digits method are referred to as ____________________ methods of depreciation. accelerated
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Easy Topic: Acquisition and Depreciation
18-33
Chapter 18 - Property, Plant, and Equipment
31. A company uses the units-of-output method of computing depreciation on its fleet of cars. A car that costs $26,000 is expected to have a useful life of 75,000 miles and an expected salvage value of $2,000 at the end of its useful life. The rate for each mile is ___________________. $0.32 (26000 - 2000)/75000
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Medium Topic: Acquisition and Depreciation
32. A company uses the units-of-output method of computing depreciation on its fleet of cars. A car that costs $37,000 is expected to have a useful life of 120,000 miles and an expected salvage value of $1,000 at the end of its useful life. The rate for each mile is ___________________. $0.30 (37000 - 1000)/120000.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Medium Topic: Acquisition and Depreciation
18-34
Chapter 18 - Property, Plant, and Equipment
33. In determining the impairment of a long-term asset, an accountant applies the _________________ test to compare the asset's net book value with estimated cash flows from the asset's future use. recoverability
AACSB: Reflective Thinking AICPA FN: Measurement Bloom's: Remember Learning Objective: 18-07 Recognize asset impairment and understand the general concepts of accounting for impairment. Level: Easy Topic: Special Topics in Long-Term Assets
34. The Modified Accelerated Cost Recovery System (MACRS) is required for ______________ income tax purposes. federal
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 18-03 Apply the Modified Accelerated Cost Recovery System (MACRS) for federal income tax purposes. Level: Easy Topic: Acquisition and Depreciation
35. When an asset is acquired by trading in an asset already owned in exchange for the new one, the amount received on the trade-in is called the ______________. allowance, amount allowed
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 18-05 Record asset trade-ins using financial accounting rules and income tax requirements. Level: Easy Topic: Disposition of Assets
18-35
Chapter 18 - Property, Plant, and Equipment
36. If the property used in a business has physical substance and is not real estate it is _____________ property. personal
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 18-01 Determine the amount to record as an asset's cost. Level: Easy Topic: Acquisition and Depreciation
Multiple Choice Questions
37. Which method of depreciation is seldom, if ever, used for financial accounting purposes? A. the modified accelerated cost recovery system (MACRS) B. the sum-of-the-years'-digits method C. the declining-balance method D. the straight-line method
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 18-03 Apply the Modified Accelerated Cost Recovery System (MACRS) for federal income tax purposes. Level: Easy Topic: Acquisition and Depreciation
38. A firm purchases an asset for $50,000 and estimates that it will have a useful life of five years and a salvage value of $5,000. Under the double-declining-balance method, the depreciation expense for the first year of the asset's useful life is A. $9,000. B. $18,000. C. $10,000. D. $20,000. 20000 = (50000 x (2 x 20%))
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Medium Topic: Acquisition and Depreciation
18-36
Chapter 18 - Property, Plant, and Equipment
39. A firm purchases an asset for $50,000 and estimates that it will have a useful life of five years and a salvage value of $5,000. Under the straight-line method, the depreciation expense for the first year of the asset's useful life is A. $9,000. B. $18,000. C. $10,000. D. $20,000. 9000 = (50000 - 5000)/5.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Medium Topic: Acquisition and Depreciation
40. A firm purchases an asset for $50,000 and estimates that it will have a useful life of five years and a salvage value of $5,000. Under the straight-line method, the balance in the accumulated deprecation account, after the second year, will be A. $9,000. B. $18,000. C. $10,000. D. $20,000. 18000 = 9000 x 2.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Medium Topic: Acquisition and Depreciation
18-37
Chapter 18 - Property, Plant, and Equipment
41. The entry to record the sale of equipment used in a business may include a debit to A. the Equipment account. B. the Gain on Sale of Equipment account. C. the Accumulated Depreciation—Equipment account. D. Depreciation Expense account.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 18-04 Record sales of plant and equipment. Level: Easy Topic: Disposition of Assets
42. The method of depreciation that results in the same amount of depreciation expense each year is the A. units-of-output method. B. straight-line method. C. sum-of-the-years'-digits method. D. declining-balance method.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Easy Topic: Acquisition and Depreciation
43. The book value of an asset is A. the market value of the asset. B. the portion of the asset's cost that has not yet been charged to expense. C. the acquisition cost shown in the asset account less the estimated salvage value. D. the replacement cost of the asset.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Easy Topic: Acquisition and Depreciation
18-38
Chapter 18 - Property, Plant, and Equipment
44. An asset that cost $14,000 was sold for $9,000 cash. Accumulated depreciation on the asset was $7,000. The entry to record this transaction includes the recognition of A. a gain of $2,000. B. a loss of $5,000. C. neither a gain nor a loss. D. a loss of $2,000. 14000 - 7000 = 7000; 9000 - 7000 = 2000 gain.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-04 Record sales of plant and equipment. Level: Medium Topic: Disposition of Assets
45. An asset that cost $25,000 was sold for $9,000 cash. Accumulated depreciation on the asset was $16,000. The entry to record this transaction includes the recognition of A. a gain of $9,000. B. a loss of $7,000. C. neither a gain nor a loss. D. a loss of $2,000. 25000 - 16000 - 9000 = 0; no gain and no loss.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-04 Record sales of plant and equipment. Level: Medium Topic: Disposition of Assets
18-39
Chapter 18 - Property, Plant, and Equipment
46. An asset that cost $25,000 was sold for $8,000 cash. Accumulated depreciation on the asset was $16,000. The entry to record this transaction includes the recognition of A. a gain of $8,000. B. a loss of $1,000. C. neither a gain nor a loss. D. a gain of $1,000. 25000 - 16000 = 9000; 9000 - 8000 = 1000 loss.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-04 Record sales of plant and equipment. Level: Medium Topic: Disposition of Assets
47. Assume that a business trades in an old cash register for a new one. Under the income tax method, A. a gain may be recognized, but a loss cannot be recorded. B. the cost of the new asset is recorded as the cash paid for the new asset. C. the asset account is debited for the difference between the original cost of the old asset and the fair market value of the new asset. D. the cost of the new asset is recorded as the book value of the old asset plus the cash amount paid or to be paid.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 18-05 Record asset trade-ins using financial accounting rules and income tax requirements. Level: Easy Topic: Disposition of Assets
18-40
Chapter 18 - Property, Plant, and Equipment
48. Equipment that cost $20,000 was sold for $12,000 cash. Accumulated depreciation on the asset was $14,000. The entry to record the sale includes a credit to the Equipment account for A. $6,000. B. $12,000. C. $20,000. D. $14,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 18-04 Record sales of plant and equipment. Level: Easy Topic: Disposition of Assets
49. The cost of an intangible asset A. should be immediately charged to expense if the cost was incurred to develop the intangible asset. B. should be immediately charged to expense whether the intangible asset was developed internally or purchased. C. should be recorded as an asset whose cost, like the cost of land, will not be allocated to expense. D. should be charged to expense over the life of the intangible asset.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 18-07 Recognize asset impairment and understand the general concepts of accounting for impairment. Level: Easy Topic: Special Topics in Long-Term Assets
18-41
Chapter 18 - Property, Plant, and Equipment
50. A company purchased equipment for $16,000 cash. In addition, the company paid $1,000 to have the equipment delivered and $500 to have it installed. The cost of this asset for financial accounting purposes is A. $16,000. B. $17,000. C. $17,500. D. $16,500.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-01 Determine the amount to record as an asset's cost. Level: Medium Topic: Acquisition and Depreciation
51. An example of real property is A. machinery. B. factory equipment. C. computer equipment. D. buildings.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 18-01 Determine the amount to record as an asset's cost. Level: Easy Topic: Acquisition and Depreciation
52. The allocation of the costs of natural resources, such as minerals, to the units produced is referred to as A. depreciation. B. depletion. C. amortization. D. salvage value.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 18-06 Compute and record depletion of natural resources. Level: Easy Topic: Special Topics in Long-Term Assets
18-42
Chapter 18 - Property, Plant, and Equipment
53. When computing depreciation, the salvage value should be ignored if a company uses A. the units-of-output method. B. the sum-of-the-years'-digits method. C. the declining-balance method. D. the straight-line method.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Easy Topic: Acquisition and Depreciation
54. The amount of a long-term asset's impairment is A. the difference between the asset's current market value and historical cost. B. the estimated net cash flows from the asset's future use less its accumulated depreciation. C. the current market value of the asset. D. the amount by which the asset's book value exceeds its market value.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 18-08 Compute and record amortization and impairment of intangible assets. Level: Easy Topic: Special Topics in Long-Term Assets
55. Dom's Delivery purchased a van for $32,000. The transportation charges were $400, sales tax was $2,240, and the license cost $250. Special shelving was installed in the van for $4,300. In addition, Dom had the company name painted on the doors. This cost the company $1,250. The total cost of the van to record in the proper asset account is A. $40,190. B. $40,440. C. $38,940. D. $39,190.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-01 Determine the amount to record as an asset's cost. Level: Medium Topic: Acquisition and Depreciation
18-43
Chapter 18 - Property, Plant, and Equipment
56. Which of the following is NOT a class under MACRS for personal property? A. 5 year class B. 7 year class C. 10 year class D. 27.5 year class
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 18-03 Apply the Modified Accelerated Cost Recovery System (MACRS) for federal income tax purposes. Level: Easy Topic: Acquisition and Depreciation
57. Under MACRS, the highest percent—resulting in the highest deprecation expense— occurs during which year? A. first B. second C. third D. fourth
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 18-03 Apply the Modified Accelerated Cost Recovery System (MACRS) for federal income tax purposes. Level: Easy Topic: Acquisition and Depreciation
18-44
Chapter 18 - Property, Plant, and Equipment
58. Financial accounting rules (GAAP) and federal income tax rules differ for handling depreciation on the trade-in of an asset. Which of the following is correct?
A. Option A. B. Option B. C. Option C. D. Option D.
AACSB: Analytic AICPA BB: Legal Bloom's: Apply Learning Objective: 18-05 Record asset trade-ins using financial accounting rules and income tax requirements. Level: Medium Topic: Disposition of Assets
59. Which of the following abides by the principle of conservatism regarding trade-ins? A. recording only the loss B. recording only the gain C. recording both the loss and the gain D. recording neither the loss nor the gain
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 18-05 Record asset trade-ins using financial accounting rules and income tax requirements. Level: Easy Topic: Disposition of Assets
18-45
Chapter 18 - Property, Plant, and Equipment
60. For federal income tax purposes, the depletion expense deducted from income is the larger of cost depletion or ___________. A. amount per table provided with forms B. percentage depletion C. units-of-production times the calculated rate per unit D. number of units extracted times the calculated rate per unit
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 18-06 Compute and record depletion of natural resources. Level: Easy Topic: Special Topics in Long-Term Assets
61. The process by which the cost of natural resources extracted are allocated is A. depreciation. B. amortization. C. depletion. D. evaluation.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 18-06 Compute and record depletion of natural resources. Learning Objective: 18-09 Define the accounting terms new to this chapter. Level: Easy Topic: Special Topics in Long-Term Assets
62. All of the following refer to the handling of a decline in value of property, plant, and equipment except A. depreciation. B. impairment. C. realization principle. D. conservatism constraint.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 18-07 Recognize asset impairment and understand the general concepts of accounting for impairment. Level: Easy Topic: Special Topics in Long-Term Assets
18-46
Chapter 18 - Property, Plant, and Equipment
63. The steps in the process of determining an impairment loss in their proper order are A. apply the recoverability test, review circumstances that suggest impairment, compute the amount of the impairment. B. apply the recoverability test, review circumstances that suggest impairment, record the amount of the impairment. C. review circumstances that suggest impairment, apply the recoverability test, and compute the amount of the impairment. D. review circumstances that suggest impairment, apply the recoverability test, record the amount of the impairment.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 18-07 Recognize asset impairment and understand the general concepts of accounting for impairment. Level: Easy Topic: Special Topics in Long-Term Assets
64. Intangible assets may be purchased or developed. If developed, they are categorized as Research and Development and A. depreciated over their useful life. B. amortized over their useful life. C. depleted over their useful life. D. expensed.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 18-08 Compute and record amortization and impairment of intangible assets. Level: Easy Topic: Special Topics in Long-Term Assets
18-47
Chapter 18 - Property, Plant, and Equipment
65. Amortization is the periodic transfer of an intangible's cost to expense done on a A. straight-line or unit-of-production basis. B. straight-line or sum-of-the years basis. C. declining basis or percentage depletion basis. D. percentage depletion or straight-line basis.
AACSB: Analytic AICPA FN: Measurement Bloom's: Comprehension Bloom's: Understand Learning Objective: 18-08 Compute and record amortization and impairment of intangible assets. Learning Objective: 18-09 Define the accounting terms new to this chapter. Level: Easy Topic: Special Topics in Long-Term Assets
Short Answer Questions
18-48
Chapter 18 - Property, Plant, and Equipment
66. On January 2, 2013, the Hanover Company purchased some office equipment for $20,000. The equipment is expected to have a useful life of five years and a salvage value of $2,000. Prepare a schedule showing the annual depreciation for each of the first three years of the asset's life under the straight-line method, the double-declining-balance method, and the sumof-the-years'-digits method.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Medium Topic: Acquisition and Depreciation
18-49
Chapter 18 - Property, Plant, and Equipment
67. On January 2, 2013, the Unit Manufacturing Company purchased manufacturing equipment for $62,000. The equipment is expected to have a useful life of six years and a salvage value of $2,000. Prepare a schedule showing the annual depreciation for each of the first three years of the asset's life under the straight-line method, the double-declining-balance method, and the sum-of-the-years'-digits method.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Medium Topic: Acquisition and Depreciation
18-50
Chapter 18 - Property, Plant, and Equipment
68. On January 3, 2013, the Soloman Toy Company purchased a machine for $24,000. The machine is expected to produce 200,000 units during its useful life of five years and have a salvage value of $2,000 at the end of that period. The machine produced 41,000 units in 2013, 38,000 units in 2014, and 40,000 units in 2015. Prepare a schedule showing the annual depreciation for 2013, 2014, and 2015 under the straight-line method and the units-of-output method.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Medium Topic: Acquisition and Depreciation
18-51
Chapter 18 - Property, Plant, and Equipment
69. Modern Products Company purchased new packaging equipment for $245,000 on January 1, 2013. The equipment is expected to be used for 6 years, or 60,000 operating hours. It has an estimated salvage value of $5,000. The equipment was used for 10,000 hours in 2013, 15,000 hours in 2014, and 12,000 hours in 2015. Compute annual depreciation expense for the first three years, using the straight-line method, the double-declining balance method, and the units of output method.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Medium Topic: Acquisition and Depreciation
18-52
Chapter 18 - Property, Plant, and Equipment
70. In 2013 a mining company paid $150,000 for mining rights. It is estimated that a total of 200,000 tons of ore are available to be extracted. During 2013, 18,000 tons of ore were mined. What is the amount of Depletion Expense recorded in the adjusting entry for 2013? $13,500
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-06 Compute and record depletion of natural resources. Level: Medium Topic: Special Topics in Long-Term Assets
71. In 2013 Lucky Mining Company paid $800,000 for mining rights. It is estimated that a total of 400,000 kilograms of ore are available to be extracted. During 2013, 60,000 tons of ore were mined. What is the amount of Depletion Expense recorded in the adjusting entry for 2013? $120,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-06 Compute and record depletion of natural resources. Level: Medium Topic: Special Topics in Long-Term Assets
18-53
Chapter 18 - Property, Plant, and Equipment
72. Modern Products Company purchased new packaging equipment for $245,000 on January 1, 2013. The equipment is expected to be used for 6 years, or 60,000 operating hours. It has an estimated salvage value of $5,000. The equipment was used for 10,000 hours in 2013, 15,000 hours in 2014, and 12,000 hours in 2015. Compute annual depreciation expense for the first three years, using the straight-line method, the double-declining balance method, and the units of output method.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Medium Topic: Acquisition and Depreciation
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Chapter 18 - Property, Plant, and Equipment
73. Selected transactions of the Harrel Company are listed below. The company uses the straight-line method of depreciation. Record the transactions on page 9 of a general journal. Omit descriptions.
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Chapter 18 - Property, Plant, and Equipment
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-01 Determine the amount to record as an asset's cost. Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Learning Objective: 18-04 Record sales of plant and equipment. Learning Objective: 18-05 Record asset trade-ins using financial accounting rules and income tax requirements. Level: Medium Topic: Acquisition and Depreciation Topic: Disposition of Assets
18-56
Chapter 18 - Property, Plant, and Equipment
74. On, January 2, 2013, Rubble Sand and Gravel Company purchased equipment for $77,000. The equipment was to be used for five years and had a $2,000 estimated residual value. On January 2, 2013, equipment was sold for $30,000. Record the transactions on page 9 of a general journal. Omit descriptions.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Learning Objective: 18-04 Record sales of plant and equipment. Level: Medium Topic: Acquisition and Depreciation Topic: Disposition of Assets
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Chapter 18 - Property, Plant, and Equipment
75. On, January 2, 2013, Rubble Sand and Gravel Company purchased equipment for $77,000. The equipment was to be used for five years and had a $2,000 estimated residual value. On January 2, 2013, equipment was sold for $35,000. Record the transactions on page 9 of a general journal. Omit descriptions.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Learning Objective: 18-04 Record sales of plant and equipment. Level: Medium Topic: Acquisition and Depreciation Topic: Disposition of Assets
76. MPG Industries purchased a new printing press on January 2, 2013 for a cost of $245,000. Transportation costs to have it delivered were $734. The floor had to have new supports because of the weight of the press. The new supports cost $2,540, which included installation. After the press was in place, two employees took training classes to learn how to use the press at a cost of $1,600. The Equipment account is debited for what amount? $248,274 (245,000 + 734 + 2,540). The training was not part of the purchase price, transportation costs, installation, or modifications needed to prepare the press for use.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-01 Determine the amount to record as an asset's cost. Level: Medium Topic: Acquisition and Depreciation
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Chapter 18 - Property, Plant, and Equipment
77. DJG Corporation purchased land in order to build new corporate headquarters for a purchase price of $758,000. The lawyers charged $2,500 to handle the legal aspects of the purchase. Closing costs paid by DJG amounted to $15,160. There was an old factory and warehouse on the property that cost DJG $7,500 to have removed. In addition, CSB Construction charged the corporation $1,800 to grade the property to ensure proper drainage and an additional $15,800 build a drive, parking lot, and walkways. What amount should be recorded as land? What other account(s) should be increased and for what amount(s)? Land is increased (debited) for $784,960 (758,000 + 2,500 + 15,160 + 7,500 + 1,800). Land Improvements is also increased (debited) for $15,800.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-01 Determine the amount to record as an asset's cost. Level: Medium Topic: Acquisition and Depreciation
ARB Company purchased several pieces of equipment on January 2, 2013. Office Furniture cost the company $16,000, has an estimated useful life of ten years, at which time they expect to sell it for a total of $500. Office Equipment was also purchased for a total of $10,750 and has an estimated useful life of five years. They don't expect it to have any residual value at the end of that time.
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Chapter 18 - Property, Plant, and Equipment
78. Using the information shown, write the journal entry for the purchase of the Office Furniture assuming it was purchased on credit by signing a note and the journal entry for the Office Equipment purchase assuming that a check was written for it.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-01 Determine the amount to record as an asset's cost. Level: Medium Topic: Acquisition and Depreciation
79. Using the information shown, calculate the depreciation for 2013, 2014, and 2015 if ARB Company uses the straight-line method. Complete the journal entry for the depreciation expense for 2013. 2013 depreciation expense for the furniture is $1,550 and $1,075 for the equipment for each year, 2013, 2014, and 2015. The journal entry for 2013 is:
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Medium Topic: Acquisition and Depreciation
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Chapter 18 - Property, Plant, and Equipment
80. Using the information shown, calculate the depreciation for 2013, 2014, and 2015 under the double-declining-balance method (DDB).
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Medium Topic: Acquisition and Depreciation
81. Using the information shown, calculate the depreciation for 2013, 2014, and 2015 using the Sum-of-the-Years'-Digits Method. (Round to the nearest whole dollar.)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-02 Compute and record depreciation of property; plant; and equipment by commonly used methods. Level: Medium Topic: Acquisition and Depreciation
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Chapter 18 - Property, Plant, and Equipment
82. Define intangible assets. List several examples of intangible assets. How are intangible assets handled for financial reporting if their lives can be estimated? How are they handled for financial reporting if their lives cannot be estimated? Intangible assets are owned by the organization, but they do not have a physical substance. Examples of intangible assets are: copyrights, patents, trademarks, trade names, brand names, franchises, purchased computer software (an exception to the rule applies to this asset), organization costs, and goodwill. If the life of the intangible asset can be estimated, amortization expense is recorded each year over the shorter of its legal or estimated useful life. If the life of the intangible asset cannot be estimated, it is assessed each year to estimate its value. If the estimated value is less than the existing book value, it is written down for the amount of its impairment. A Loss from Impairment of $XXX is debited and the asset itself is credited for the same amount.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 18-08 Compute and record amortization and impairment of intangible assets. Learning Objective: 18-09 Define the accounting terms new to this chapter. Level: Medium Topic: Special Topics in Long-Term Assets
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Chapter 18 - Property, Plant, and Equipment
83. Explain MACRS by creating a list of its characteristics. Include the type of depreciation method it is, when it is required, how property is classified, etc. (Answers will vary per student, but should include most of the following.) MACRS is
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 18-03 Apply the Modified Accelerated Cost Recovery System (MACRS) for federal income tax purposes. Level: Medium Topic: Acquisition and Depreciation
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Chapter 18 - Property, Plant, and Equipment
84. ASB Ceramics purchased equipment used in the business three years ago for $32,000. The accumulated depreciation account related to the equipment asset account had a balance of $15,000. The equipment had an estimated salvage (residual) value of $2,000 and had an estimated life of six years. A full year's depreciation was taken the first year. ASB uses the straight-line depreciation method. All depreciation is usually recorded at yearend. The company sold the equipment in exchange for a promissory note on July 1 of the current year for $13,000. Record the appropriate entries necessary.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-04 Record sales of plant and equipment. Level: Medium Topic: Disposition of Assets
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Chapter 18 - Property, Plant, and Equipment
85. JRB Preschool purchased a van used in the business three years ago for $36,500. The accumulated depreciation account related to the equipment asset account had a balance of $18,000. The equipment had an estimated salvage (residual) value of $6,500 and had an estimated life of five years. A full year's depreciation was taken the first year. JRB uses the straight-line depreciation method. All depreciation is usually recorded at yearend. The company sold the equipment in exchange for a promissory note on July 1 of the current year for $12,000. Record the appropriate entries necessary.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-04 Record sales of plant and equipment. Level: Medium Topic: Disposition of Assets
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Chapter 18 - Property, Plant, and Equipment
86. Trade-ins are treated as sales of assets for accounting purposes. Explain the difference in treatment when the trade-in of an asset results in a gain and the treatment when the trade-in of an asset results in a loss. When an asset is traded-in and after recording any depreciation up to the date of that trade-in, its book value (cost minus A/D to date) is less than the trade-in allowed on the asset, a gain results. However, the gain is not reported as such. Instead, the cash paid for the new asset is added to the book value of the old asset and this becomes the basis of the new asset. If the book value of the old asset is more than the trade-in allowed, then the new asset is recorded at its fair market value (agreed on price by the seller and the buyer) and the loss is also recorded. In both cases, the account representing the old asset historical cost and its related accumulated depreciation are both removed from the financial accounting records.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 18-05 Record asset trade-ins using financial accounting rules and income tax requirements. Level: Medium Topic: Disposition of Assets
87. C C Coal Company purchased the coal rights in an area for $4,050,000. They estimated that the area contained 9,000,000 tons of coal. The first year of operations in the area yielded 110,000 tons of coal. What is the depletion cost per ton of coal? What is the depletion expense for this first year? Depletion cost per ton = $0.45 (4,050,000/9,000,000). Depletion expense in year one = $49,500 (110,000 x .45).
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-06 Compute and record depletion of natural resources. Level: Medium Topic: Special Topics in Long-Term Assets
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Chapter 18 - Property, Plant, and Equipment
88. Cullen's Catering owns a delivery van which it depreciates applying the units-of-output method (units-of-production method). The original cost of the van was $44,000. When it was purchased in July of 2013, it was estimated that it would be driven for 125,000 miles over four years and then sold for an expected salvage value of $4,500. During 2013 the van was driven 17,230 miles. What is the depreciation expense for 2013? (Round final answer to the nearest whole dollar.) $5,445 ($44,000 minus $4,500 = $39,500; $39,500/125,000 = 0.316; 0.316 per mile x 17,230 miles = $5,445)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-06 Compute and record depletion of natural resources. Level: Medium Topic: Acquisition and Depreciation
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Chapter 18 - Property, Plant, and Equipment
Ryadom Industries has several assets with book values that exceed their fair market values. At the end of the year (December 31, 2013), management at Ryadom reviewed the circumstances around several of its assets during the current year and determined that they were impaired. Each of the assets reviewed has a book value (carrying value) that exceeds its fair market value. The accountant at Ryadom applied the recoverability test to each. The first item is a Mixer that combines materials for a product that can now be made more efficiently due to new technology. The new mixer can produce seven products for every two that the Mixer Ryadom currently uses. This reduces Ryadom's ability to compete with companies who have invested in the newly developed mixers. In addition, the Mixer now has a market value of zero. The Mixer cost $235,000, had an original residual of $35,000 and an estimated life of ten years. Ryadom uses straight-line depreciation for its equipment. The Accumulated Depreciation for the Mixer is $120,000. The projected cash flows generated by the Mixer are $50,000 over the next four years. The second impaired asset is one of its facilities at a location that now cannot transport its product due to the closing of a rail line. Because the product cannot be transported given the present dilemma, the estimated future revenues generated by this facility are $30,000—the amount for which it is estimated that the facility can be sold. The facility buildings have a new value of $24,000 and the land has an unchanged estimated value of $7,000. The estimated remaining life of the facility is unchanged. The facility would require a large investment in order to accommodate trucks to pick up and transport the product or to deliver materials. This additional investment is not merited. Therefore, Ryadom plans to close and hopefully sell this facility. The facility has total recorded costs of $2,500,000 and its related accumulated depreciation account totals $1,800,000 (residual value was $100,000, estimated life was 8 years and straight-line depreciation was used). If the facility is not sold within the next two years, it will be demolished. It will be depreciated using the straight-line method assuming a zero residual value at that time.
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Chapter 18 - Property, Plant, and Equipment
89. Using the information shown, record the journal entries to record the amount of the impairment for these two situations.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-07 Recognize asset impairment and understand the general concepts of accounting for impairment. Level: Medium Topic: Special Topics in Long-Term Assets
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Chapter 18 - Property, Plant, and Equipment
90. A. Using the information shown, record the journal entry for the sale of the facility for $26,450. Assume that the sale took place on July 1, 2013, six months after the facility was written down. Record the journal entry made to update the books prior to the sale. B. In addition, assume that the new technology that made the Mixer owned by the company has been determined to environmental unsound and has been called off the market. The estimated revenues generated by the Mixer are recalculated to a total of $150,000 over the next four years. Explain what Ryadom Industries must do regarding its asset accounts regarding this turn of events. A)
The gain on the sale of the facility and land is $1,450. (Book value of the facility is $18,000) ($24,000 less six months of depreciation in the amount of $6,000, plus the book value of the land of $7,000 totals $25,000. The fair market value or sale price is $26,450 resulting in a gain of $1,450.) B) No action need be taken on the books. Once an impairment of an asset has been recorded, the amount charged-off is not reinstated. This is consistent with the principle of conservatism.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 18-04 Record sales of plant and equipment. Learning Objective: 18-07 Recognize asset impairment and understand the general concepts of accounting for impairment. Level: Hard Topic: Disposition of Assets Topic: Special Topics in Long-Term Assets
18-70
Chapter 18 - Property, Plant, and Equipment
91. C & T Company purchased a company that produced bottled water with fruit juice additives. The brand name for these products, Fruit Options, was well known and had a wellestablished customer base. At the time of purchase, January 2 of the current year, C & T valued this brand name at $250,000. The life of this intangible asset cannot be determined. However, it was assessed at the end of the year at the purchase price. The patent for the unique processing of the fruit juices had a remaining life of 8 years and an amount of $4,800 was recorded on the books for it. Prepare the journal entries for the amortization of these items at C & T's yearend, June 30.
No entry is required for the brand name. It was correct of C & T to assess its worth at the end of the year so that an adjustment for impairment could be made if necessary.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 18-08 Compute and record amortization and impairment of intangible assets. Level: Medium Topic: Special Topics in Long-Term Assets
18-71
Chapter 19 - Accounting for Partnerships
Chapter 19 Accounting for Partnerships True / False Questions
1. A partnership has a limited life. It ends with the death or withdrawal of a partner. True False
2. Some partners, known as limited partners, may not be personally liable for the debts of the partnership. True False
3. A legal partnership does not exist unless there is a written partnership agreement. True False
4. The cost of merchandise withdrawn by a partner for personal use is recorded as a debit to the partner's drawing account and a credit to the Purchases account. True False
5. The assets of a sole proprietorship are revalued before they are assumed by a partnership. True False
6. Investments by a partner are credited to that partner's capital account. True False
7. The journal entry to record the division of a partnership profit consists of a debit to each partner's capital account and a credit to Cash. True False
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Chapter 19 - Accounting for Partnerships
8. Salary and interest allowances for partners are treated as expenses of the firm and are used in the determination of net income. True False
9. Salary and interest allowances are considered in distributing net income to partners but not in distributing a net loss. True False
10. The entry to close a partner's drawing account at the end of a fiscal period includes a debit to the partner's drawing account. True False
11. It is customary for a partnership's income statement to show how the net income or loss for the year has been divided between the partners. True False
12. A gain or loss on revaluation of assets should be allocated to the partners according to the balances of their capital accounts. True False
13. The dissolution of a partnership and the formation of a new partnership may have no noticeable effect on the continuing operations of the business. True False
14. If a new partner purchases an interest in a partnership firm directly from an existing partner, the Cash account is debited and the new partner's capital account is credited. True False
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Chapter 19 - Accounting for Partnerships
15. Upon withdrawal, the withdrawing partner(s) may receive less than their capital account balances. True False
Fill in the Blank Questions
16. The characteristic of a partnership that means that any partner can make valid contracts for the partnership is known as ___________________. ________________________________________
17. An association of two or more persons to carry on, as co-owners, a business for profit is called a(n) ___________________. ________________________________________
18. A partnership has a(n) ____________________ life because it ends with the death or withdrawal of any partner. ________________________________________
19. Each general partner has ____________________ liability for the debts of a partnership. ________________________________________
20. The partnership ____________________ is a written contract that specifies the rights and responsibilities of the partners. ________________________________________
21. If plant and equipment are transferred from a sole proprietorship to a partnership, the Accumulated Depreciation accounts start with ____________________ balances in the partnership records. ________________________________________
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Chapter 19 - Accounting for Partnerships
22. Withdrawals of assets from a partnership that are intended to permanently reduce the invested capital are recorded as debits to the partners'____________________ accounts. ________________________________________
23. Amounts withdrawn by partners to pay personal living expenses are recorded in their ____________________ accounts. ________________________________________
24. The entry to record a partner's interest allowance includes a debit to the ____________________ account. ________________________________________
25. When dividing partnership net income, the consideration given to the amount of time a partner devotes to the business is called a salary ___________________. ________________________________________
26. If a partnership's salary and interest allowances are in excess of the net income, the entry to close Income Summary after the allowances are recorded will include a(n) ____________________ to Income Summary. ________________________________________
27. If a partnership's net income is in excess of the salary and interest allowances, the entry to close Income Summary after the allowances are recorded will include a(n) ____________________ to Income Summary. ________________________________________
28. The statement of partners' equities summarizes the changes in the partners'_________________ accounts in an accounting period. ________________________________________
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Chapter 19 - Accounting for Partnerships
29. A partnership ____________________ occurs when the partnership's assets are sold, debts are paid off, and the remaining cash is distributed to the partners. ________________________________________
30. If an individual invests more cash for an interest in an existing partnership than the book value of his or her interest, the old partners are said to receive a(n) ___________________. ________________________________________
Multiple Choice Questions
31. Which of the following statements is not correct? A. Each general partner has unlimited liability for the debts of a partnership. B. Federal income tax is levied on the net income of a partnership and on the earnings of the individual partners when the net income is distributed to them. C. Any general partner can make valid contracts for a partnership and can otherwise conduct its affairs. D. When a partner dies or is incapacitated, the partnership is dissolved.
32. Federal income tax is levied on A. a partnership based on its total net income when earned. B. the partners for their individual shares of the reported partnership income. C. the partners only when they withdraw earnings from the partnership for personal use. D. the partnership at the end of the fiscal period.
33. Which of the following is not a characteristic of a partnership? A. Each general partner has unlimited liability for the debts of the partnership. B. If one partner dies or leaves the partnership, the existing partnership is terminated. C. The partnership income is subject to a federal income tax that is levied on the business but not on the partners. D. The existing partnership agreement is dissolved and a new agreement is formed when a new partner joins the partnership.
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Chapter 19 - Accounting for Partnerships
34. The amount that each partner withdraws from a partnership A. cannot exceed the net income reported by the partnership. B. should be specified in the partnership agreement. C. is the base on which federal income taxes are levied on the partnership income. D. is usually determined by the amount of the net income.
35. Which of the following statements is correct? A. The general ledger of a partnership will include a single capital account, whose balance represents the combined equity of all the partners. B. Past-due accounts receivable should not be transferred from the financial records of a sole proprietorship to a newly formed partnership. C. The financial records of a new partnership are opened with a memorandum entry in the general journal. D. A new partner must purchase the partnership interest of another partner.
36. The entry to record the investment of cash in a partnership by one partner would consist of a debit to A. the partner's capital account and a credit to Cash. B. Cash and a credit to an account called Partners' Equities. C. Cash and a credit to the partner's capital account. D. Cash and a credit to the partner's drawing account.
37. Ryan Fuller, a sole proprietor, entered into partnership with another individual. Fuller's investment in the partnership included equipment that cost $32,000 when it was purchased. The equipment has a book value of $13,000 and a net agreed-on value of $16,000. In the financial records of the partnership, this equipment and its accumulated depreciation should be recorded at A. $16,000 and $0, respectively. B. $13,000 and $0, respectively. C. $32,000 and $19,000, respectively. D. $16,000 and $3,000, respectively.
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Chapter 19 - Accounting for Partnerships
38. Robert Ballard, a sole proprietor, entered into partnership with another individual. Ballard's investment in the partnership included equipment that cost $64,000 when it was purchased. The equipment has a book value of $26,000 and a net agreed-on value of $32,000. In the financial records of the partnership, this equipment and its accumulated depreciation should be recorded at A. $64,000 and $38,000, respectively. B. $32,000 and $6,000, respectively. C. $32,000 and $0, respectively. D. $26,000 and $0, respectively.
39. When the owner of a sole proprietorship accepts a partner, the assets of the proprietorship A. must be transferred to the partnership at the values reflected in the financial records of the proprietorship. B. must be converted to cash and used to pay any debts of the proprietorship, with excess cash available for investment in the new partnership. C. cannot be invested in the new partnership. D. may be adjusted to reflect current values before being transferred to the partnership.
40. The general ledger of a partnership will A. not contain a separate drawing account for each partner. B. contain one capital account that reflects the total equity of all partners. C. not contain a capital account or accounts. D. contain a separate capital account for each partner.
41. Which of the following statements is correct? A. If partners consider their cash withdrawals to be compensation for the work they do for the partnership, the amounts of the withdrawals should be charged to Salaries Expense. B. If there is no specific agreement on the division of partnership profits and losses, they are divided equally among the partners. C. If a salary is allowed to one partner, other partners also must receive a salary allowance. D. None of the above statements is correct.
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Chapter 19 - Accounting for Partnerships
42. The salary and interest allowances in a partnership profit-sharing agreement can best be described as A. expenses of the business that are deducted from revenue in the determination of net income. B. amounts on which each partner will not have to pay income tax. C. a means of distributing net income in relation to the services provided and the capital invested by each partner. D. a legal requirement in order for a partnership to be formed.
43. The entry to record the equal distribution of net income between two partners consists of a debit to A. Income Summary and a credit to each partner's capital account. B. each partner's capital account and a credit to Cash. C. Income Summary and a credit to each partner's drawing account. D. each partner's capital account and a credit to Income Summary.
44. The entry to record a partner's salary allowance consists of a debit to A. the partner's capital account and a credit to Cash. B. Salaries Expense and a credit to the partner's drawing account. C. Income Summary and a credit to the partner's capital account. D. Income Summary and a credit to the partner's drawing account.
45. Partnership net income of $33,000 is to be divided between two partners, Elan Chan and Roy Anderson, according to the following arrangement: There will be salary allowances of $20,000 for Chan and $10,000 for Anderson, with the remainder divided equally. How much of the net income will be distributed to Chan and Anderson, respectively? A. $22,000 and $11,000 B. $21,500 and $11,500 C. $16,500 and $16,500 D. $21,000 and $12,000
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Chapter 19 - Accounting for Partnerships
46. Partnership net income of $75,000 is to be divided between two partners, Bob Garcia and Jerry McKernan, according to the following arrangement: There will be salary allowances of $30,000 for Garcia and $20,000 for McKernan, with the remainder divided equally. How much of the net income will be distributed to Garcia and McKernan, respectively? A. $40,000 and $30,000 B. $42,500 and $32,500 C. $45,000 and $35,000 D. $67,500 and $57,500
47. Partnership net income of $66,000 is to be divided between two partners, Elan Julia Hood and Brian Duffy, according to the following arrangement: There will be salary allowances of $40,000 for Hood and $20,000 for Duffy, with the remainder divided equally. How much of the net income will be distributed to Chan and Anderson, respectively? A. $33,000 and $33,000 B. $42,000 and $24,000 C. $43,000 and $23,000 D. $44,000 and $22,000
48. Partnership net income of $132,000 is to be divided between two partners, Jessie Folk and Jessica Stephens, according to the following arrangement: There will be salary allowances of $80,000 for Folk and $40,000 for Stephens, with the remainder divided equally. How much of the net income will be distributed to Folk and Stephens, respectively? A. $88,000 and $44,000 B. $86,000 and $46,000 C. $84,000 and $48,000 D. $66,000 and $66,000
49. If no other method of dividing net income or net losses is specified in the partnership agreement, it is divided A. in relation to the partners' capital account balances. B. in relation to the amount of time each partner devotes to the business. C. in relation to the original investment by each partner. D. equally.
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Chapter 19 - Accounting for Partnerships
50. The partners' salary and interest allowances are recorded in A. expense accounts. B. drawing accounts. C. capital accounts. D. liability accounts.
51. All of the following are included on the statement of partners' equities except A. withdrawals. B. additional investments. C. salary allowances. D. share of net income or net loss.
52. Danny Ortiz and Angela Hufford are partners, and each has a capital balance of $25,000. To gain admission to the partnership, Derek Peters pays $15,000 directly to Ortiz for one-half of his equity. After the admission of Peters, the total partners' equity in the records of the partnership will be A. $65,000. B. $62,500. C. $50,000. D. $75,000.
53. Sam McGuire and Marcos Valle are partners, and each has a capital balance of $50,000. To gain admission to the partnership, Scott Jordan pays $35,000 directly to Valle for one-half of his equity. After the admission of Jordan, the total partners' equity in the records of the partnership will be A. $50,000. B. $67,500. C. $85,000. D. $100,000
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Chapter 19 - Accounting for Partnerships
54. Ben White and Lisa Caputi are partners, and each has a capital balance of $50,000. To gain admission to the partnership, Tim Smith pays $30,000 directly to White for one-half of his equity. After the admission of Smith, the total partners' equity in the records of the partnership will be A. $150,000. B. $130,000. C. $125,000. D. $100,000.
55. Kara Johnson and Tyler Jones are partners, and each has a capital balance of $100,000. To gain admission to the partnership, Raiden Nash pays $60,000 directly to Johnson for one-half of her equity. After the admission of Nash, the total partners' equity in the records of the partnership will be A. $200,000. B. $250,000. C. $260,000. D. $300,000.
56. If an individual invests more cash for an interest in an existing partnership than the book value of his or her interests, an entry is made to debit A. Cash and credit the capital account of each existing partner. B. Cash and credit the drawing account of each existing partner. C. Cash and credit the Income Summary account for the excess. D. each existing partner's capital account and credit Cash.
57. Which of the following statements is correct? A. If a new partner invests cash in an existing partnership and a bonus is given to a new partner, the old partners' capital accounts increase. B. When a new partner is admitted to an existing partnership upon an investment of cash, the new partner's capital accounts may appropriately be debited for an amount other than the amount of cash invested. C. The partnership agreement should include steps to follow if a partner withdraws from the partnership. D. When a new partner is admitted to an existing partnership upon an investment of cash, the new partner's capital accounts will equal the amount of cash the new partner invested.
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Chapter 19 - Accounting for Partnerships
Short Answer Questions
58. Janice Miller operates a sole proprietorship business that sells camping equipment. On January 1, 2013, Miller has agreed to transfer her assets and liabilities to a partnership that will operate The Camping Company. Miller will own a two-thirds interest in the capital of the partnership. The agreed upon values of assets and liabilities to be transferred follow. Accounts receivable of $50,000 (of which approximately $2,000 is uncollectible) Merchandise inventory, $90,000 Furniture and fixtures, $60,000 Accounts payable, $32,000 Record the receipt of the assets and liabilities by the partnership on page 1 of a general journal. Omit the description.
59. Mary Ann Mason operates a sole proprietorship business that sells craft supplies. On January 1, 2013, Mason has agreed to transfer her assets and liabilities to a partnership that will operate The Craft Company. Mason will own a one-third interest in the capital of the partnership. The agreed upon values of assets and liabilities to be transferred follow. Accounts receivable of $2,000 (of which approximately $200 is uncollectible) Merchandise inventory, $4,000 Furniture and fixtures, $6,000 Accounts payable, $1,000 Record the receipt of the assets and liabilities by the partnership on page 1 of a general journal. Omit the description.
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Chapter 19 - Accounting for Partnerships
60. Blake Kredell owns and operates a retail business called Blake's Camera Shop. His postclosing trial balance on December 31, 2013, is provided below. Blake plans to enter into a partnership with Carmen Santos, effective January 1, 2014. Profits and losses will be shared equally. Blake will transfer all assets and liabilities of his store to the partnership, after revaluation. Santos will invest cash equal to Blake's investment after revaluation. The agreed values are: Accounts Receivable (net), $7,500; Merchandise Inventory, $27,000; and Store Equipment, $8,000.The partnership will operate under the name Picture Perfect. Record each partner's investment on page 1 of a general journal. Omit descriptions. Prepare a balance sheet for Picture Perfect just after the investments.
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Chapter 19 - Accounting for Partnerships
61. Patsy Garrison owns and operates a bakery called Patsy's Pasteries. Her postclosing trial balance on December 31, 2013, is provided below. Garrison plans to enter into a partnership with Erika Noreen, effective January 1, 2014. Profits and losses will be shared equally. Garrison will transfer all assets and liabilities of her store to the partnership, after revaluation. Noreen will invest cash equal to Garrison's investment after revaluation. The agreed values are: Accounts Receivable (net), $15,000; Merchandise Inventory, $54,000; and Store Equipment, $16,000. The partnership will operate under the name Baker's Delight. Record each partner's investment on page 1 of a general journal. Omit descriptions. Prepare a balance sheet for Baker's Delight just after the investments.
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Chapter 19 - Accounting for Partnerships
62. Brian McCarthy owns and operates a business called Brian's Music Shop. His postclosing trial balance on December 31, 2013, is provided below. Brian plans to enter into a partnership with Emma Jones, effective January 1, 2014. Profits and losses will be shared equally. Brian will transfer all assets and liabilities of his shop to the partnership, after revaluation. Emma will invest cash equal to Brian's investment after revaluation. The agreed values are: Accounts Receivable (net), $10,000; Merchandise Inventory, $35,000; and Store Equipment, $15,000. The partnership will operate under the name Beautiful Music. Record each partner's investment on page 1 of a general journal. Omit descriptions. Prepare a balance sheet for Beautiful Music just after the investments.
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Chapter 19 - Accounting for Partnerships
63. Net income for the Gifts Galore for the year ended December 31, 2013, was $18,000. The partners, Chang and Jennings, share profits in the ratio of 70 and 30 percent, respectively. 1. How much of the net income will be allocated to Chang? 2. How much of the net income will be allocated to Jennings?
64. Net income for Costmore Sales for the year ended December 31, 2013, was $32,000.The partners, Johnson and Lindstrom, share profits in the ratio of 60 and 40 percent, respectively. The balance in Johnson's capital account is $60,000. The balance in Lindstrom's capital account is $60,000. 1. How much of the net income will be allocated to Johnson? 2. How much of the net income will be allocated to Lindstrom?
65. Wright and Beard are partners. Net income or loss is allocated on the basis of the balances of the partners' capital accounts at the beginning of the year. On January 1, 2013, the balances were Wright, $42,000, and Beard, $18,000. Net loss for the partnership for the year ended December 31, 2013, was $9,000. 1. How much of the net loss will be allocated to Wright? 2. How much of the net loss will be allocated to Beard?
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Chapter 19 - Accounting for Partnerships
66. Martinez and Lopez are partners in business named Builders' Services. For the year ended December 31, 2013, net income for Builders' Services was $60,000. Net income or loss is allocated on the basis of the balances of the partners' capital accounts at the beginning of the year. On January 1, 2013, the balances were Martinez, $48,000, and Lopez, $24,000. 1. How much of the net income will be allocated to Martinez? 2. How much of the net income will be allocated to Lopez?
67. Escobar and Woods are partners who share profits and losses in the ratio of 60 and 40 percent, respectively. The partnership agreement provides that each will be paid a yearly salary of $18,000. The salaries were paid to the partners during 2013 and were charged to the partners' drawing accounts. The Income Summary account has a credit balance of $60,000 after revenue and expense accounts are closed at the end of the year. 1. What amount of net income or loss will be allocated to Escobar? 2. What amount of net income or loss will be allocated to Woods?
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Chapter 19 - Accounting for Partnerships
68. Madison and Hamilton are partners who share profits and losses equally. The partnership agreement provides that Madison will be paid an annual salary of $40,000 and Hamilton will be paid an annual salary of $30,000. The salaries were paid to the partners during 2013 and were charged to the partners' drawing accounts. The Income Summary account has a credit balance of $80,000 after revenue and expense accounts are closed at the end of the year. 1. What amount of net income or loss will be allocated to Madison? 2. What amount of net income or loss will be allocated to Hamilton?
69. Lenik and Olsen are partners who share profits and losses in the ratio of 60 and 40 percent, respectively. The partnership agreement provides that each will be paid a yearly salary of $19,000. The salaries were paid to the partners during 2013 and were charged to the partners' drawing accounts. The Income Summary account has a debit balance of $4,000 after revenue and expense accounts are closed at the end of the year. 1. What amount of net income or loss will be allocated to Lenik? 2. What amount of net income or loss will be allocated to Olsen?
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Chapter 19 - Accounting for Partnerships
70. Mavis and Roxanne are partners who share profits and losses equally. The partnership agreement provides that Mavis will be paid an annual salary of $54,000 and Roxanne will be paid an annual salary of $36,000. The salaries were paid to the partners during 2013 and were charged to the partners' drawing accounts. The Income Summary account has a debit balance of $10,000 after revenue and expense accounts are closed at the end of the year. 1. What amount of net income or loss will be allocated to Mavis? 2. What amount of net income or loss will be allocated to Roxanne?
71. Norton and Morris are partners. The partnership agreement provides that Norton will receive a salary of $26,000 and Morris will receive a salary of $20,000. These salaries were paid to the partners during 2013 and were charged to the partners' drawing accounts. Both partners also receive 10 percent on their capital balances at the beginning of the year. The balance of any remaining profits or losses is divided equally. The beginning capital account balances for 2013 were Norton, $100,000, and Morris, $80,000. At the end of the year, the partnership has a net income of $60,000. 1. What amount of net income or loss will be allocated to Norton? 2. What amount of net income or loss will be allocated to Morris?
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Chapter 19 - Accounting for Partnerships
72. Norma and Marilyn are partners. The partnership agreement provides that Norma will receive a salary of $30,000 and Marilyn will receive a salary of $50,000. These salaries were paid to the partners during 2013 and were charged to the partners' drawing accounts. Both partners also receive 8 percent on their capital balances at the beginning of the year. The balance of any remaining profits or losses is divided equally. The beginning capital account balances for 2013 were Norma, $80,000, and Marilyn, $40,000. At the end of the year, the partnership has a net income of $90,000. 1. What amount of net income or loss will be allocated to Norma? 2. What amount of net income or loss will be allocated to Marilyn?
73. Walters and Kim are partners. The partnership agreement provides for salary allowances of $26,000 for Walters and $22,000 for Kim and for interest of 10 percent on each partner's invested capital at the beginning of the year. The balance of any remaining profits or losses is to be divided 40 percent to Walters and 60 percent to Kim. On January 1, 2013, the capital account balances were Walters, $75,000, and Kim, $95,000. Net income for the year was $72,000. 1. On page 10 of a general journal, record the following entries on December 31, 2013. Omit descriptions. A) Record the salary allowances for the year. B) Record the interest allowances for the year. C) Record the division of the balance of net income. D) Close the drawing accounts into the capital accounts. Assume that the partners have withdrawn the full amount of their salaries. 2. Prepare a schedule showing the division of net income to the partners as it would appear on the income statement for 2013.
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Chapter 19 - Accounting for Partnerships
74. Bryce and Kendall are partners. The partnership agreement provides for salary allowances of $52,000 for Bryce and $44,000 for Kendall and for interest of 10 percent on each partner's invested capital at the beginning of the year. The balance of any remaining profits or losses is to be divided 40 percent to Bryce and 60 percent to Kendall. On January 1, 2013, the capital account balances were Bryce, $150,000, and Kendall, $190,000. Net income for the year was $144,000. 1. On page 22 of a general journal, record the following entries on December 31, 2013. Omit descriptions. A) Record the salary allowances for the year. B) Record the interest allowances for the year. C) Record the division of the balance of net income. D) Close the drawing accounts into the capital accounts. Assume that the partners have withdrawn the full amount of their salaries. 2. Prepare a schedule showing the division of net income to the partners as it would appear on the income statement for 2013.
75. Nancy Conradt and Chris Russell are partners who share profits and losses in the ratio of 60:40, respectively. On December 31, 2013, they decide that Russell will sell one-half of his interest to Pam Ortega. At that time, the balances of the capital accounts are $500,000 for Conradt and $700,000 for Russell. The partners agree that before the new partner is admitted, certain assets should be revalued. These assets include merchandise inventory carried at $411,200 revalued at $403,600, and a building with a book value of $260,000 revalued at $450,000. On page 10 of a general journal, record the revaluation entries. Omit descriptions. Then, determine the capital balances of the two existing partners after the revaluation is made.
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Chapter 19 - Accounting for Partnerships
76. Brian Colt and Karen Randall are partners who share profits and losses in the ratio of 70:30, respectively. On December 31, 2013, they decide that Randall will sell one-half of her interest to Jane Wu. At that time, the balances of the capital accounts are $70,000 for Colt and $30,000 for Randall. The partners agree that before the new partner is admitted, certain assets should be revalued. These assets include merchandise inventory carried at $11,000 revalued at $10,000, and a building with a book value of $60,000 revalued at $70,000. On page 10 of a general journal, record the revaluation entries. Omit descriptions. Then, determine the capital balances of the two existing partners after the revaluation is made.
77. Peter Nguyen and Loren Washington are partners who share profits and losses in the ratio of 60:40, respectively. On December 31, 2013, they decide that Washington will sell one-half of her interest to Grace Dolores. At that time, the balances of the capital accounts are $75,000 for Nguyen and $45,000 for Washington. The partners agree that before the new partner is admitted, certain assets should be revalued. These assets include merchandise inventory carried at $42,000 revalued at $48,000, and a building with a book value of $100,000 revalued at $120,000. On page 10 of a general journal, record the revaluation entries. Omit descriptions. Then, determine the capital balances of the two existing partners after the revaluation is made.
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Chapter 19 - Accounting for Partnerships
78. Catherine Vollick and Danica Hubbard are partners. To expand the expertise of their business, they have agreed to admit Kyle Simon to the partnership on January 1, 2013. The capital account balances on January 1, 2013, after revaluation of assets, are Vollick, $80,000, and Hubbard, $60,000. Net income or net loss is shared equally. On page 8 of a general journal, record the admission of Simon to the partnership on January 1, 2013, assuming that Vollick sells one-half of her interest to Simon for $50,000 in cash. Omit the description.
79. Kaitlyn Fields and Tyler Unger are partners. To expand the expertise of their business, they have agreed to admit Serena Singh to the partnership on January 1, 2013. The capital account balances on January 1, 2013, after revaluation of assets, are Fields, $80,000, and Unger, $60,000. Net income or net loss is shared equally. On page 7 of a general journal, record the admission of Singh to the partnership on January 1, 2013, assuming that Fields sells one-half of her interest to Singh for $39,000 in cash. Omit the description.
80. Roy Reynolds and Mike Truesdale are partners. To expand the expertise of their business, they have agreed to admit Jennie Fellows to the partnership on January 1, 2013. The capital account balances on January 1, 2013, after revaluation of assets, are Reynolds, $80,000, and Truesdale, $60,000. Net income or net loss is shared equally. On page 20 of a general journal, record the admission of Fellows to the partnership on January 1, 2013, assuming that Fellows invests $46,000 for 20 percent interest in the business. Omit the descriptions.
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Chapter 19 - Accounting for Partnerships
81. Karen Schuler and Mary Ryan are partners. To expand the expertise of their business, they have agreed to admit Samuel Wing to the partnership on January 1, 2013. The capital account balances on January 1, 2013, after revaluation of assets, are Schuler, $80,000, and Ryan, $60,000. Net income or net loss is shared equally. On page 10 of a general journal, record the admission of Wing to the partnership on January 1, 2013, assuming that Wing invests $58,000 for one-third interest in the business. Omit the descriptions.
82. Spalding, Dane, and Manson are partners, sharing profits and losses in the ratio of 30, 40, and 30 percent respectively. Their partnership agreement provides that if one of them withdraws from the partnership, the assets and liabilities are to be revalued, the gain or loss allocated to the partners, and the retiring partner paid the balance of his account. Manson withdraws from the partnership on December 31, 2013. The capital account balances before recording revaluation are Spalding, $230,000; Dane, $250,000; and Manson, $220,000. The effect of the revaluation is to increase Merchandise Inventory by $21,000 and the Building account balance by $41,000. How much cash will be paid to Manson?
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Chapter 19 - Accounting for Partnerships
83. Garvey, Lopes, and Russell are partners, sharing profits and losses in the ratio of 35, 35, and 30 percent respectively. Their partnership agreement provides that if one of them withdraws from the partnership, the assets and liabilities are to be revalued, the gain or loss allocated to the partners, and the retiring partner paid the balance of his account. Garvey withdraws from the partnership on December 31, 2013. The capital account balances before recording revaluation are Garvey, $280,000; Lopes, $230,000; and Russell, $290,000. The effect of the revaluation is to increase Merchandise Inventory by $44,000 and the Building account balance by $76,000. How much cash will be paid to Garvey?
84. Abbott, Casper, and Costello are partners, sharing profits and losses in the ratio of 30, 30, and 40 percent respectively. Their partnership agreement provides that if one of them withdraws from the partnership, the assets and liabilities are to be revalued, the gain or loss allocated to the partners, and the retiring partner paid the balance of his account. Costello withdraws from the partnership on December 31, 2013. The capital account balances before recording revaluation are Abbott, $130,000; Casper $150,000; and Costello, $120,000. The effect of the revaluation is to increase Merchandise Inventory by $5,000 and the Building account balance by $20,000. How much cash will be paid to Costello?
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Chapter 19 - Accounting for Partnerships
Matching Questions
85. Match the accounting terms with the description by entering the proper number. 1. A member of a partnership who has unlimited liability 2. A financial statement prepared to summarize the changes in partners' capital accounts during an accounting period 3. An association of two or more persons who carry on, as co-owners, a business for profit 4. Another term for partnership agreement 5. An informational entry in the general journal 6. The legal term for termination of a partnership 7. A legal contract forming a partnership and specifying certain details of operation 8. The implication that a creditor can look to all partners' personal assets as well as the assets of the partnership for payment of the firm's debts 9. The amount of net income or net loss allocated to each partner 10. Termination of a business by distributing all assets and discontinuing the business 11. A partnership having one or more limited partners 12. A member of a partnership whose liability is limited to his or her investment in the partnership 13. The characteristic of a partnership by which each partner is empowered to act as an agent for the partnership, binding the firm by his or her acts Partnership
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General partner ____
Distributive share ____ Partnership agreement ____ Unlimited liability ____ Limited partner ____ Dissolution ____ Memorandum entry ____
Mutual agency ____ Limited partnership ____ Liquidation ____ Statement of partners' equities ____ Articles of partnership ____
Partnership ____
Chapter 19 - Accounting for Partnerships
Chapter 19 Accounting for Partnerships Answer Key
True / False Questions
1. A partnership has a limited life. It ends with the death or withdrawal of a partner. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 19-01 Explain the major advantages and disadvantages of a partnership. Level: Easy Topic: Forming a Partnership
2. Some partners, known as limited partners, may not be personally liable for the debts of the partnership. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 19-01 Explain the major advantages and disadvantages of a partnership. Level: Easy Topic: Forming a Partnership
3. A legal partnership does not exist unless there is a written partnership agreement. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 19-02 State the important provisions that should be included in every partnership agreement. Level: Easy Topic: Forming a Partnership
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Chapter 19 - Accounting for Partnerships
4. The cost of merchandise withdrawn by a partner for personal use is recorded as a debit to the partner's drawing account and a credit to the Purchases account. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 19-03 Account for the formation of a partnership. Level: Easy Topic: Forming a Partnership
5. The assets of a sole proprietorship are revalued before they are assumed by a partnership. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 19-03 Account for the formation of a partnership. Level: Easy Topic: Forming a Partnership
6. Investments by a partner are credited to that partner's capital account. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 19-03 Account for the formation of a partnership. Level: Easy Topic: Forming a Partnership
7. The journal entry to record the division of a partnership profit consists of a debit to each partner's capital account and a credit to Cash. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Easy Topic: Allocating Income or Loss
19-28
Chapter 19 - Accounting for Partnerships
8. Salary and interest allowances for partners are treated as expenses of the firm and are used in the determination of net income. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Easy Topic: Allocating Income or Loss
9. Salary and interest allowances are considered in distributing net income to partners but not in distributing a net loss. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Easy Topic: Allocating Income or Loss
10. The entry to close a partner's drawing account at the end of a fiscal period includes a debit to the partner's drawing account. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Easy Topic: Allocating Income or Loss
19-29
Chapter 19 - Accounting for Partnerships
11. It is customary for a partnership's income statement to show how the net income or loss for the year has been divided between the partners. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 19-05 Prepare a statement of partners' equities. Level: Easy Topic: Allocating Income or Loss
12. A gain or loss on revaluation of assets should be allocated to the partners according to the balances of their capital accounts. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 19-06 Account for the revaluation of assets and liabilities prior to the dissolution of a partnership. Level: Easy Topic: Partnership Changes
13. The dissolution of a partnership and the formation of a new partnership may have no noticeable effect on the continuing operations of the business. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 19-06 Account for the revaluation of assets and liabilities prior to the dissolution of a partnership. Level: Easy Topic: Partnership Changes
14. If a new partner purchases an interest in a partnership firm directly from an existing partner, the Cash account is debited and the new partner's capital account is credited. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 19-07 Account for the sale of a partnership interest. Level: Easy Topic: Partnership Changes
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Chapter 19 - Accounting for Partnerships
15. Upon withdrawal, the withdrawing partner(s) may receive less than their capital account balances. TRUE
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 19-09 Account for the withdrawal of a partner from a partnership. Level: Easy Topic: Partnership Changes
Fill in the Blank Questions
16. The characteristic of a partnership that means that any partner can make valid contracts for the partnership is known as ___________________. mutual agency
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 19-01 Explain the major advantages and disadvantages of a partnership. Learning Objective: 19-10 Define the accounting terms new to this chapter. Level: Easy Topic: Forming a Partnership
17. An association of two or more persons to carry on, as co-owners, a business for profit is called a(n) ___________________. partnership
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 19-01 Explain the major advantages and disadvantages of a partnership. Learning Objective: 19-10 Define the accounting terms new to this chapter. Level: Easy Topic: Forming a Partnership
19-31
Chapter 19 - Accounting for Partnerships
18. A partnership has a(n) ____________________ life because it ends with the death or withdrawal of any partner. limited
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 19-01 Explain the major advantages and disadvantages of a partnership. Level: Easy Topic: Forming a Partnership
19. Each general partner has ____________________ liability for the debts of a partnership. unlimited
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 19-01 Explain the major advantages and disadvantages of a partnership. Level: Easy Topic: Forming a Partnership
20. The partnership ____________________ is a written contract that specifies the rights and responsibilities of the partners. agreement
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 19-02 State the important provisions that should be included in every partnership agreement. Level: Easy Topic: Forming a Partnership
21. If plant and equipment are transferred from a sole proprietorship to a partnership, the Accumulated Depreciation accounts start with ____________________ balances in the partnership records. zero; no
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 19-03 Account for the formation of a partnership. Level: Easy Topic: Forming a Partnership
19-32
Chapter 19 - Accounting for Partnerships
22. Withdrawals of assets from a partnership that are intended to permanently reduce the invested capital are recorded as debits to the partners'____________________ accounts. capital
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 19-03 Account for the formation of a partnership. Level: Easy Topic: Forming a Partnership
23. Amounts withdrawn by partners to pay personal living expenses are recorded in their ____________________ accounts. drawing
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 19-03 Account for the formation of a partnership. Level: Easy Topic: Forming a Partnership
24. The entry to record a partner's interest allowance includes a debit to the ____________________ account. Income Summary
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Easy Topic: Allocating Income or Loss
19-33
Chapter 19 - Accounting for Partnerships
25. When dividing partnership net income, the consideration given to the amount of time a partner devotes to the business is called a salary ___________________. allowance
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Easy Topic: Allocating Income or Loss
26. If a partnership's salary and interest allowances are in excess of the net income, the entry to close Income Summary after the allowances are recorded will include a(n) ____________________ to Income Summary. credit
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Easy Topic: Allocating Income or Loss
27. If a partnership's net income is in excess of the salary and interest allowances, the entry to close Income Summary after the allowances are recorded will include a(n) ____________________ to Income Summary. debit
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Easy Topic: Allocating Income or Loss
19-34
Chapter 19 - Accounting for Partnerships
28. The statement of partners' equities summarizes the changes in the partners'_________________ accounts in an accounting period. capital
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 19-05 Prepare a statement of partners' equities. Level: Easy Topic: Allocating Income or Loss
29. A partnership ____________________ occurs when the partnership's assets are sold, debts are paid off, and the remaining cash is distributed to the partners. liquidation
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 19-06 Account for the revaluation of assets and liabilities prior to the dissolution of a partnership. Level: Easy Topic: Partnership Changes
30. If an individual invests more cash for an interest in an existing partnership than the book value of his or her interest, the old partners are said to receive a(n) ___________________. bonus
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 19-08 Account for the investment of a new partner in an existing partnership. Level: Easy Topic: Partnership Changes
19-35
Chapter 19 - Accounting for Partnerships
Multiple Choice Questions
31. Which of the following statements is not correct? A. Each general partner has unlimited liability for the debts of a partnership. B. Federal income tax is levied on the net income of a partnership and on the earnings of the individual partners when the net income is distributed to them. C. Any general partner can make valid contracts for a partnership and can otherwise conduct its affairs. D. When a partner dies or is incapacitated, the partnership is dissolved.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 19-01 Explain the major advantages and disadvantages of a partnership. Level: Easy Topic: Forming a Partnership
32. Federal income tax is levied on A. a partnership based on its total net income when earned. B. the partners for their individual shares of the reported partnership income. C. the partners only when they withdraw earnings from the partnership for personal use. D. the partnership at the end of the fiscal period.
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 19-01 Explain the major advantages and disadvantages of a partnership. Level: Easy Topic: Forming a Partnership
19-36
Chapter 19 - Accounting for Partnerships
33. Which of the following is not a characteristic of a partnership? A. Each general partner has unlimited liability for the debts of the partnership. B. If one partner dies or leaves the partnership, the existing partnership is terminated. C. The partnership income is subject to a federal income tax that is levied on the business but not on the partners. D. The existing partnership agreement is dissolved and a new agreement is formed when a new partner joins the partnership.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 19-01 Explain the major advantages and disadvantages of a partnership. Level: Easy Topic: Forming a Partnership
34. The amount that each partner withdraws from a partnership A. cannot exceed the net income reported by the partnership. B. should be specified in the partnership agreement. C. is the base on which federal income taxes are levied on the partnership income. D. is usually determined by the amount of the net income.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 19-02 State the important provisions that should be included in every partnership agreement. Level: Easy Topic: Forming a Partnership
35. Which of the following statements is correct? A. The general ledger of a partnership will include a single capital account, whose balance represents the combined equity of all the partners. B. Past-due accounts receivable should not be transferred from the financial records of a sole proprietorship to a newly formed partnership. C. The financial records of a new partnership are opened with a memorandum entry in the general journal. D. A new partner must purchase the partnership interest of another partner.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 19-03 Account for the formation of a partnership. Level: Easy Topic: Forming a Partnership
19-37
Chapter 19 - Accounting for Partnerships
36. The entry to record the investment of cash in a partnership by one partner would consist of a debit to A. the partner's capital account and a credit to Cash. B. Cash and a credit to an account called Partners' Equities. C. Cash and a credit to the partner's capital account. D. Cash and a credit to the partner's drawing account.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 19-03 Account for the formation of a partnership. Level: Easy Topic: Forming a Partnership
37. Ryan Fuller, a sole proprietor, entered into partnership with another individual. Fuller's investment in the partnership included equipment that cost $32,000 when it was purchased. The equipment has a book value of $13,000 and a net agreed-on value of $16,000. In the financial records of the partnership, this equipment and its accumulated depreciation should be recorded at A. $16,000 and $0, respectively. B. $13,000 and $0, respectively. C. $32,000 and $19,000, respectively. D. $16,000 and $3,000, respectively.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-03 Account for the formation of a partnership. Level: Medium Topic: Forming a Partnership
19-38
Chapter 19 - Accounting for Partnerships
38. Robert Ballard, a sole proprietor, entered into partnership with another individual. Ballard's investment in the partnership included equipment that cost $64,000 when it was purchased. The equipment has a book value of $26,000 and a net agreed-on value of $32,000. In the financial records of the partnership, this equipment and its accumulated depreciation should be recorded at A. $64,000 and $38,000, respectively. B. $32,000 and $6,000, respectively. C. $32,000 and $0, respectively. D. $26,000 and $0, respectively.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-03 Account for the formation of a partnership. Level: Medium Topic: Forming a Partnership
39. When the owner of a sole proprietorship accepts a partner, the assets of the proprietorship A. must be transferred to the partnership at the values reflected in the financial records of the proprietorship. B. must be converted to cash and used to pay any debts of the proprietorship, with excess cash available for investment in the new partnership. C. cannot be invested in the new partnership. D. may be adjusted to reflect current values before being transferred to the partnership.
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 19-03 Account for the formation of a partnership. Level: Easy Topic: Forming a Partnership
19-39
Chapter 19 - Accounting for Partnerships
40. The general ledger of a partnership will A. not contain a separate drawing account for each partner. B. contain one capital account that reflects the total equity of all partners. C. not contain a capital account or accounts. D. contain a separate capital account for each partner.
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 19-03 Account for the formation of a partnership. Level: Easy Topic: Forming a Partnership
41. Which of the following statements is correct? A. If partners consider their cash withdrawals to be compensation for the work they do for the partnership, the amounts of the withdrawals should be charged to Salaries Expense. B. If there is no specific agreement on the division of partnership profits and losses, they are divided equally among the partners. C. If a salary is allowed to one partner, other partners also must receive a salary allowance. D. None of the above statements is correct.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Easy Topic: Allocating Income or Loss
19-40
Chapter 19 - Accounting for Partnerships
42. The salary and interest allowances in a partnership profit-sharing agreement can best be described as A. expenses of the business that are deducted from revenue in the determination of net income. B. amounts on which each partner will not have to pay income tax. C. a means of distributing net income in relation to the services provided and the capital invested by each partner. D. a legal requirement in order for a partnership to be formed.
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Easy Topic: Allocating Income or Loss
43. The entry to record the equal distribution of net income between two partners consists of a debit to A. Income Summary and a credit to each partner's capital account. B. each partner's capital account and a credit to Cash. C. Income Summary and a credit to each partner's drawing account. D. each partner's capital account and a credit to Income Summary.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Easy Topic: Allocating Income or Loss
19-41
Chapter 19 - Accounting for Partnerships
44. The entry to record a partner's salary allowance consists of a debit to A. the partner's capital account and a credit to Cash. B. Salaries Expense and a credit to the partner's drawing account. C. Income Summary and a credit to the partner's capital account. D. Income Summary and a credit to the partner's drawing account.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Easy Topic: Allocating Income or Loss
45. Partnership net income of $33,000 is to be divided between two partners, Elan Chan and Roy Anderson, according to the following arrangement: There will be salary allowances of $20,000 for Chan and $10,000 for Anderson, with the remainder divided equally. How much of the net income will be distributed to Chan and Anderson, respectively? A. $22,000 and $11,000 B. $21,500 and $11,500 C. $16,500 and $16,500 D. $21,000 and $12,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Medium Topic: Allocating Income or Loss
19-42
Chapter 19 - Accounting for Partnerships
46. Partnership net income of $75,000 is to be divided between two partners, Bob Garcia and Jerry McKernan, according to the following arrangement: There will be salary allowances of $30,000 for Garcia and $20,000 for McKernan, with the remainder divided equally. How much of the net income will be distributed to Garcia and McKernan, respectively? A. $40,000 and $30,000 B. $42,500 and $32,500 C. $45,000 and $35,000 D. $67,500 and $57,500
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Medium Topic: Allocating Income or Loss
47. Partnership net income of $66,000 is to be divided between two partners, Elan Julia Hood and Brian Duffy, according to the following arrangement: There will be salary allowances of $40,000 for Hood and $20,000 for Duffy, with the remainder divided equally. How much of the net income will be distributed to Chan and Anderson, respectively? A. $33,000 and $33,000 B. $42,000 and $24,000 C. $43,000 and $23,000 D. $44,000 and $22,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Medium Topic: Allocating Income or Loss
19-43
Chapter 19 - Accounting for Partnerships
48. Partnership net income of $132,000 is to be divided between two partners, Jessie Folk and Jessica Stephens, according to the following arrangement: There will be salary allowances of $80,000 for Folk and $40,000 for Stephens, with the remainder divided equally. How much of the net income will be distributed to Folk and Stephens, respectively? A. $88,000 and $44,000 B. $86,000 and $46,000 C. $84,000 and $48,000 D. $66,000 and $66,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Medium Topic: Allocating Income or Loss
49. If no other method of dividing net income or net losses is specified in the partnership agreement, it is divided A. in relation to the partners' capital account balances. B. in relation to the amount of time each partner devotes to the business. C. in relation to the original investment by each partner. D. equally.
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Easy Topic: Allocating Income or Loss
19-44
Chapter 19 - Accounting for Partnerships
50. The partners' salary and interest allowances are recorded in A. expense accounts. B. drawing accounts. C. capital accounts. D. liability accounts.
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Easy Topic: Allocating Income or Loss
51. All of the following are included on the statement of partners' equities except A. withdrawals. B. additional investments. C. salary allowances. D. share of net income or net loss.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 19-05 Prepare a statement of partners' equities. Level: Easy Topic: Allocating Income or Loss
52. Danny Ortiz and Angela Hufford are partners, and each has a capital balance of $25,000. To gain admission to the partnership, Derek Peters pays $15,000 directly to Ortiz for one-half of his equity. After the admission of Peters, the total partners' equity in the records of the partnership will be A. $65,000. B. $62,500. C. $50,000. D. $75,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-07 Account for the sale of a partnership interest. Level: Medium Topic: Partnership Changes
19-45
Chapter 19 - Accounting for Partnerships
53. Sam McGuire and Marcos Valle are partners, and each has a capital balance of $50,000. To gain admission to the partnership, Scott Jordan pays $35,000 directly to Valle for one-half of his equity. After the admission of Jordan, the total partners' equity in the records of the partnership will be A. $50,000. B. $67,500. C. $85,000. D. $100,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-07 Account for the sale of a partnership interest. Level: Medium Topic: Partnership Changes
54. Ben White and Lisa Caputi are partners, and each has a capital balance of $50,000. To gain admission to the partnership, Tim Smith pays $30,000 directly to White for one-half of his equity. After the admission of Smith, the total partners' equity in the records of the partnership will be A. $150,000. B. $130,000. C. $125,000. D. $100,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-07 Account for the sale of a partnership interest. Level: Medium Topic: Partnership Changes
19-46
Chapter 19 - Accounting for Partnerships
55. Kara Johnson and Tyler Jones are partners, and each has a capital balance of $100,000. To gain admission to the partnership, Raiden Nash pays $60,000 directly to Johnson for one-half of her equity. After the admission of Nash, the total partners' equity in the records of the partnership will be A. $200,000. B. $250,000. C. $260,000. D. $300,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-07 Account for the sale of a partnership interest. Level: Medium Topic: Partnership Changes
56. If an individual invests more cash for an interest in an existing partnership than the book value of his or her interests, an entry is made to debit A. Cash and credit the capital account of each existing partner. B. Cash and credit the drawing account of each existing partner. C. Cash and credit the Income Summary account for the excess. D. each existing partner's capital account and credit Cash.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 19-08 Account for the investment of a new partner in an existing partnership. Level: Easy Topic: Partnership Changes
19-47
Chapter 19 - Accounting for Partnerships
57. Which of the following statements is correct? A. If a new partner invests cash in an existing partnership and a bonus is given to a new partner, the old partners' capital accounts increase. B. When a new partner is admitted to an existing partnership upon an investment of cash, the new partner's capital accounts may appropriately be debited for an amount other than the amount of cash invested. C. The partnership agreement should include steps to follow if a partner withdraws from the partnership. D. When a new partner is admitted to an existing partnership upon an investment of cash, the new partner's capital accounts will equal the amount of cash the new partner invested.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 19-08 Account for the investment of a new partner in an existing partnership. Learning Objective: 19-09 Account for the withdrawal of a partner from a partnership. Level: Easy Topic: Partnership Changes
19-48
Chapter 19 - Accounting for Partnerships
Short Answer Questions
58. Janice Miller operates a sole proprietorship business that sells camping equipment. On January 1, 2013, Miller has agreed to transfer her assets and liabilities to a partnership that will operate The Camping Company. Miller will own a two-thirds interest in the capital of the partnership. The agreed upon values of assets and liabilities to be transferred follow. Accounts receivable of $50,000 (of which approximately $2,000 is uncollectible) Merchandise inventory, $90,000 Furniture and fixtures, $60,000 Accounts payable, $32,000 Record the receipt of the assets and liabilities by the partnership on page 1 of a general journal. Omit the description.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 19-03 Account for the formation of a partnership. Level: Medium Topic: Forming a Partnership
19-49
Chapter 19 - Accounting for Partnerships
59. Mary Ann Mason operates a sole proprietorship business that sells craft supplies. On January 1, 2013, Mason has agreed to transfer her assets and liabilities to a partnership that will operate The Craft Company. Mason will own a one-third interest in the capital of the partnership. The agreed upon values of assets and liabilities to be transferred follow. Accounts receivable of $2,000 (of which approximately $200 is uncollectible) Merchandise inventory, $4,000 Furniture and fixtures, $6,000 Accounts payable, $1,000 Record the receipt of the assets and liabilities by the partnership on page 1 of a general journal. Omit the description.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 19-03 Account for the formation of a partnership. Level: Medium Topic: Forming a Partnership
19-50
Chapter 19 - Accounting for Partnerships
60. Blake Kredell owns and operates a retail business called Blake's Camera Shop. His postclosing trial balance on December 31, 2013, is provided below. Blake plans to enter into a partnership with Carmen Santos, effective January 1, 2014. Profits and losses will be shared equally. Blake will transfer all assets and liabilities of his store to the partnership, after revaluation. Santos will invest cash equal to Blake's investment after revaluation. The agreed values are: Accounts Receivable (net), $7,500; Merchandise Inventory, $27,000; and Store Equipment, $8,000.The partnership will operate under the name Picture Perfect. Record each partner's investment on page 1 of a general journal. Omit descriptions. Prepare a balance sheet for Picture Perfect just after the investments.
19-51
Chapter 19 - Accounting for Partnerships
19-52
Chapter 19 - Accounting for Partnerships
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 19-03 Account for the formation of a partnership. Level: Medium Topic: Forming a Partnership
19-53
Chapter 19 - Accounting for Partnerships
61. Patsy Garrison owns and operates a bakery called Patsy's Pasteries. Her postclosing trial balance on December 31, 2013, is provided below. Garrison plans to enter into a partnership with Erika Noreen, effective January 1, 2014. Profits and losses will be shared equally. Garrison will transfer all assets and liabilities of her store to the partnership, after revaluation. Noreen will invest cash equal to Garrison's investment after revaluation. The agreed values are: Accounts Receivable (net), $15,000; Merchandise Inventory, $54,000; and Store Equipment, $16,000. The partnership will operate under the name Baker's Delight. Record each partner's investment on page 1 of a general journal. Omit descriptions. Prepare a balance sheet for Baker's Delight just after the investments.
19-54
Chapter 19 - Accounting for Partnerships
19-55
Chapter 19 - Accounting for Partnerships
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 19-03 Account for the formation of a partnership. Level: Medium Topic: Forming a Partnership
19-56
Chapter 19 - Accounting for Partnerships
62. Brian McCarthy owns and operates a business called Brian's Music Shop. His postclosing trial balance on December 31, 2013, is provided below. Brian plans to enter into a partnership with Emma Jones, effective January 1, 2014. Profits and losses will be shared equally. Brian will transfer all assets and liabilities of his shop to the partnership, after revaluation. Emma will invest cash equal to Brian's investment after revaluation. The agreed values are: Accounts Receivable (net), $10,000; Merchandise Inventory, $35,000; and Store Equipment, $15,000. The partnership will operate under the name Beautiful Music. Record each partner's investment on page 1 of a general journal. Omit descriptions. Prepare a balance sheet for Beautiful Music just after the investments.
19-57
Chapter 19 - Accounting for Partnerships
19-58
Chapter 19 - Accounting for Partnerships
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 19-03 Account for the formation of a partnership. Level: Medium Topic: Forming a Partnership
19-59
Chapter 19 - Accounting for Partnerships
63. Net income for the Gifts Galore for the year ended December 31, 2013, was $18,000. The partners, Chang and Jennings, share profits in the ratio of 70 and 30 percent, respectively. 1. How much of the net income will be allocated to Chang? 2. How much of the net income will be allocated to Jennings? 1. $12,600; 2. $5,400 Feedback: Chang = 18,000 x .7 = $12,600. Jennings = 18,000 x. 3 = $5,400.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Medium Topic: Allocating Income or Loss
64. Net income for Costmore Sales for the year ended December 31, 2013, was $32,000.The partners, Johnson and Lindstrom, share profits in the ratio of 60 and 40 percent, respectively. The balance in Johnson's capital account is $60,000. The balance in Lindstrom's capital account is $60,000. 1. How much of the net income will be allocated to Johnson? 2. How much of the net income will be allocated to Lindstrom? 1. $19,200; 2. $12,800 Feedback: Johnson = 32,000 x .6 = $19,200. Lindstrom = 32,000 x. 4 = $12,800.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Medium Topic: Allocating Income or Loss
19-60
Chapter 19 - Accounting for Partnerships
65. Wright and Beard are partners. Net income or loss is allocated on the basis of the balances of the partners' capital accounts at the beginning of the year. On January 1, 2013, the balances were Wright, $42,000, and Beard, $18,000. Net loss for the partnership for the year ended December 31, 2013, was $9,000. 1. How much of the net loss will be allocated to Wright? 2. How much of the net loss will be allocated to Beard? 1. $6,300; 2. $2,700 Feedback: Wright = (42,000/60,000) x 9,000 = $6,300. Beard = (18,000/60,000) x 9,000 = $2,700.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Medium Topic: Allocating Income or Loss
66. Martinez and Lopez are partners in business named Builders' Services. For the year ended December 31, 2013, net income for Builders' Services was $60,000. Net income or loss is allocated on the basis of the balances of the partners' capital accounts at the beginning of the year. On January 1, 2013, the balances were Martinez, $48,000, and Lopez, $24,000. 1. How much of the net income will be allocated to Martinez? 2. How much of the net income will be allocated to Lopez? 1. $40,000; 2. $20,000 Feedback: Martinez = (48,000/72,000) x 60,000 = $40,000. Lopez = (24,000/72,000) x 60,000 = $20,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Medium Topic: Allocating Income or Loss
19-61
Chapter 19 - Accounting for Partnerships
67. Escobar and Woods are partners who share profits and losses in the ratio of 60 and 40 percent, respectively. The partnership agreement provides that each will be paid a yearly salary of $18,000. The salaries were paid to the partners during 2013 and were charged to the partners' drawing accounts. The Income Summary account has a credit balance of $60,000 after revenue and expense accounts are closed at the end of the year. 1. What amount of net income or loss will be allocated to Escobar? 2. What amount of net income or loss will be allocated to Woods? 1. $32,400 ($18,000 + $14,400); 2. $27,600 ($18,000 + $9,600)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Medium Topic: Allocating Income or Loss
68. Madison and Hamilton are partners who share profits and losses equally. The partnership agreement provides that Madison will be paid an annual salary of $40,000 and Hamilton will be paid an annual salary of $30,000. The salaries were paid to the partners during 2013 and were charged to the partners' drawing accounts. The Income Summary account has a credit balance of $80,000 after revenue and expense accounts are closed at the end of the year. 1. What amount of net income or loss will be allocated to Madison? 2. What amount of net income or loss will be allocated to Hamilton? 1. $45,000 ($40,000 + $5,000); 2. $35,000 ($30,000 + $5,000)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Medium Topic: Allocating Income or Loss
19-62
Chapter 19 - Accounting for Partnerships
69. Lenik and Olsen are partners who share profits and losses in the ratio of 60 and 40 percent, respectively. The partnership agreement provides that each will be paid a yearly salary of $19,000. The salaries were paid to the partners during 2013 and were charged to the partners' drawing accounts. The Income Summary account has a debit balance of $4,000 after revenue and expense accounts are closed at the end of the year. 1. What amount of net income or loss will be allocated to Lenik? 2. What amount of net income or loss will be allocated to Olsen? 1. $2,000; 2. $2,000; $4,000/2 = $2,000 loss each
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Medium Topic: Allocating Income or Loss
70. Mavis and Roxanne are partners who share profits and losses equally. The partnership agreement provides that Mavis will be paid an annual salary of $54,000 and Roxanne will be paid an annual salary of $36,000. The salaries were paid to the partners during 2013 and were charged to the partners' drawing accounts. The Income Summary account has a debit balance of $10,000 after revenue and expense accounts are closed at the end of the year. 1. What amount of net income or loss will be allocated to Mavis? 2. What amount of net income or loss will be allocated to Roxanne? 1. ($5,000); 2. ($5,000); $10,000/2 = $5,000 loss each
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Medium Topic: Allocating Income or Loss
19-63
Chapter 19 - Accounting for Partnerships
71. Norton and Morris are partners. The partnership agreement provides that Norton will receive a salary of $26,000 and Morris will receive a salary of $20,000. These salaries were paid to the partners during 2013 and were charged to the partners' drawing accounts. Both partners also receive 10 percent on their capital balances at the beginning of the year. The balance of any remaining profits or losses is divided equally. The beginning capital account balances for 2013 were Norton, $100,000, and Morris, $80,000. At the end of the year, the partnership has a net income of $60,000. 1. What amount of net income or loss will be allocated to Norton? 2. What amount of net income or loss will be allocated to Morris? 1. $34,000 ($26,000 + $10,000 - $2,000) 2. $26,000 ($20,000 + $8,000 - $2,000)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Medium Topic: Allocating Income or Loss
72. Norma and Marilyn are partners. The partnership agreement provides that Norma will receive a salary of $30,000 and Marilyn will receive a salary of $50,000. These salaries were paid to the partners during 2013 and were charged to the partners' drawing accounts. Both partners also receive 8 percent on their capital balances at the beginning of the year. The balance of any remaining profits or losses is divided equally. The beginning capital account balances for 2013 were Norma, $80,000, and Marilyn, $40,000. At the end of the year, the partnership has a net income of $90,000. 1. What amount of net income or loss will be allocated to Norma? 2. What amount of net income or loss will be allocated to Marilyn? 1. $36,600 ($30,000 + $6,400 + $200) 2. $53,400 ($50,000 + $3,200 + $200)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Medium Topic: Allocating Income or Loss
19-64
Chapter 19 - Accounting for Partnerships
73. Walters and Kim are partners. The partnership agreement provides for salary allowances of $26,000 for Walters and $22,000 for Kim and for interest of 10 percent on each partner's invested capital at the beginning of the year. The balance of any remaining profits or losses is to be divided 40 percent to Walters and 60 percent to Kim. On January 1, 2013, the capital account balances were Walters, $75,000, and Kim, $95,000. Net income for the year was $72,000. 1. On page 10 of a general journal, record the following entries on December 31, 2013. Omit descriptions. A) Record the salary allowances for the year. B) Record the interest allowances for the year. C) Record the division of the balance of net income. D) Close the drawing accounts into the capital accounts. Assume that the partners have withdrawn the full amount of their salaries. 2. Prepare a schedule showing the division of net income to the partners as it would appear on the income statement for 2013.
19-65
Chapter 19 - Accounting for Partnerships
19-66
Chapter 19 - Accounting for Partnerships
AACSB: Analytic AICPA FN: Reporting Bloom's: Evaluate Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Hard Topic: Allocating Income or Loss
74. Bryce and Kendall are partners. The partnership agreement provides for salary allowances of $52,000 for Bryce and $44,000 for Kendall and for interest of 10 percent on each partner's invested capital at the beginning of the year. The balance of any remaining profits or losses is to be divided 40 percent to Bryce and 60 percent to Kendall. On January 1, 2013, the capital account balances were Bryce, $150,000, and Kendall, $190,000. Net income for the year was $144,000. 1. On page 22 of a general journal, record the following entries on December 31, 2013. Omit descriptions. A) Record the salary allowances for the year. B) Record the interest allowances for the year. C) Record the division of the balance of net income. D) Close the drawing accounts into the capital accounts. Assume that the partners have withdrawn the full amount of their salaries. 2. Prepare a schedule showing the division of net income to the partners as it would appear on the income statement for 2013.
19-67
Chapter 19 - Accounting for Partnerships
19-68
Chapter 19 - Accounting for Partnerships
AACSB: Analytic AICPA FN: Reporting Bloom's: Evaluate Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Level: Hard Topic: Allocating Income or Loss
75. Nancy Conradt and Chris Russell are partners who share profits and losses in the ratio of 60:40, respectively. On December 31, 2013, they decide that Russell will sell one-half of his interest to Pam Ortega. At that time, the balances of the capital accounts are $500,000 for Conradt and $700,000 for Russell. The partners agree that before the new partner is admitted, certain assets should be revalued. These assets include merchandise inventory carried at $411,200 revalued at $403,600, and a building with a book value of $260,000 revalued at $450,000. On page 10 of a general journal, record the revaluation entries. Omit descriptions. Then, determine the capital balances of the two existing partners after the revaluation is made.
Conradt, $609,440; Russell, $772,960
AACSB: Analytic AICPA FN: Reporting Bloom's: Evaluate Learning Objective: 19-06 Account for the revaluation of assets and liabilities prior to the dissolution of a partnership. Level: Hard Topic: Partnership Changes
19-69
Chapter 19 - Accounting for Partnerships
76. Brian Colt and Karen Randall are partners who share profits and losses in the ratio of 70:30, respectively. On December 31, 2013, they decide that Randall will sell one-half of her interest to Jane Wu. At that time, the balances of the capital accounts are $70,000 for Colt and $30,000 for Randall. The partners agree that before the new partner is admitted, certain assets should be revalued. These assets include merchandise inventory carried at $11,000 revalued at $10,000, and a building with a book value of $60,000 revalued at $70,000. On page 10 of a general journal, record the revaluation entries. Omit descriptions. Then, determine the capital balances of the two existing partners after the revaluation is made.
Colt, $77,000; Randall, $33,000
AACSB: Analytic AICPA FN: Reporting Bloom's: Evaluate Learning Objective: 19-06 Account for the revaluation of assets and liabilities prior to the dissolution of a partnership. Level: Hard Topic: Partnership Changes
19-70
Chapter 19 - Accounting for Partnerships
77. Peter Nguyen and Loren Washington are partners who share profits and losses in the ratio of 60:40, respectively. On December 31, 2013, they decide that Washington will sell one-half of her interest to Grace Dolores. At that time, the balances of the capital accounts are $75,000 for Nguyen and $45,000 for Washington. The partners agree that before the new partner is admitted, certain assets should be revalued. These assets include merchandise inventory carried at $42,000 revalued at $48,000, and a building with a book value of $100,000 revalued at $120,000. On page 10 of a general journal, record the revaluation entries. Omit descriptions. Then, determine the capital balances of the two existing partners after the revaluation is made.
Nguyen, $90,600; Washington $55,400.
AACSB: Analytic AICPA FN: Reporting Bloom's: Evaluate Learning Objective: 19-06 Account for the revaluation of assets and liabilities prior to the dissolution of a partnership. Level: Hard Topic: Partnership Changes
19-71
Chapter 19 - Accounting for Partnerships
78. Catherine Vollick and Danica Hubbard are partners. To expand the expertise of their business, they have agreed to admit Kyle Simon to the partnership on January 1, 2013. The capital account balances on January 1, 2013, after revaluation of assets, are Vollick, $80,000, and Hubbard, $60,000. Net income or net loss is shared equally. On page 8 of a general journal, record the admission of Simon to the partnership on January 1, 2013, assuming that Vollick sells one-half of her interest to Simon for $50,000 in cash. Omit the description.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 19-07 Account for the sale of a partnership interest. Level: Medium Topic: Partnership Changes
19-72
Chapter 19 - Accounting for Partnerships
79. Kaitlyn Fields and Tyler Unger are partners. To expand the expertise of their business, they have agreed to admit Serena Singh to the partnership on January 1, 2013. The capital account balances on January 1, 2013, after revaluation of assets, are Fields, $80,000, and Unger, $60,000. Net income or net loss is shared equally. On page 7 of a general journal, record the admission of Singh to the partnership on January 1, 2013, assuming that Fields sells one-half of her interest to Singh for $39,000 in cash. Omit the description.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 19-07 Account for the sale of a partnership interest. Level: Medium Topic: Partnership Changes
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Chapter 19 - Accounting for Partnerships
80. Roy Reynolds and Mike Truesdale are partners. To expand the expertise of their business, they have agreed to admit Jennie Fellows to the partnership on January 1, 2013. The capital account balances on January 1, 2013, after revaluation of assets, are Reynolds, $80,000, and Truesdale, $60,000. Net income or net loss is shared equally. On page 20 of a general journal, record the admission of Fellows to the partnership on January 1, 2013, assuming that Fellows invests $46,000 for 20 percent interest in the business. Omit the descriptions.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 19-08 Account for the investment of a new partner in an existing partnership. Level: Medium Topic: Partnership Changes
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Chapter 19 - Accounting for Partnerships
81. Karen Schuler and Mary Ryan are partners. To expand the expertise of their business, they have agreed to admit Samuel Wing to the partnership on January 1, 2013. The capital account balances on January 1, 2013, after revaluation of assets, are Schuler, $80,000, and Ryan, $60,000. Net income or net loss is shared equally. On page 10 of a general journal, record the admission of Wing to the partnership on January 1, 2013, assuming that Wing invests $58,000 for one-third interest in the business. Omit the descriptions.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 19-08 Account for the investment of a new partner in an existing partnership. Level: Medium Topic: Partnership Changes
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Chapter 19 - Accounting for Partnerships
82. Spalding, Dane, and Manson are partners, sharing profits and losses in the ratio of 30, 40, and 30 percent respectively. Their partnership agreement provides that if one of them withdraws from the partnership, the assets and liabilities are to be revalued, the gain or loss allocated to the partners, and the retiring partner paid the balance of his account. Manson withdraws from the partnership on December 31, 2013. The capital account balances before recording revaluation are Spalding, $230,000; Dane, $250,000; and Manson, $220,000. The effect of the revaluation is to increase Merchandise Inventory by $21,000 and the Building account balance by $41,000. How much cash will be paid to Manson? The increase to Manson's capital account as a result of the revaluation would be $18,600 (or ($21,000 + $41,000) x 30%), which will result in a new capital account balance of $238,600 (or $220,000 + $18,600). Since the partners have agreed that the retiring partner will be paid the balance of his account, Manson will receive $238,600.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-09 Account for the withdrawal of a partner from a partnership. Level: Medium Topic: Partnership Changes
83. Garvey, Lopes, and Russell are partners, sharing profits and losses in the ratio of 35, 35, and 30 percent respectively. Their partnership agreement provides that if one of them withdraws from the partnership, the assets and liabilities are to be revalued, the gain or loss allocated to the partners, and the retiring partner paid the balance of his account. Garvey withdraws from the partnership on December 31, 2013. The capital account balances before recording revaluation are Garvey, $280,000; Lopes, $230,000; and Russell, $290,000. The effect of the revaluation is to increase Merchandise Inventory by $44,000 and the Building account balance by $76,000. How much cash will be paid to Garvey? The increase to Garvey's capital account as a result of the revaluation would be $42,000 (or ($44,000 + $76,000) x 35%), which will result in a new capital account balance of $322,000 (or $280,000 + $42,000). Since the partners have agreed that the retiring partner will be paid the balance of his account, Garvey will receive $322,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-09 Account for the withdrawal of a partner from a partnership. Level: Medium Topic: Partnership Changes
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Chapter 19 - Accounting for Partnerships
84. Abbott, Casper, and Costello are partners, sharing profits and losses in the ratio of 30, 30, and 40 percent respectively. Their partnership agreement provides that if one of them withdraws from the partnership, the assets and liabilities are to be revalued, the gain or loss allocated to the partners, and the retiring partner paid the balance of his account. Costello withdraws from the partnership on December 31, 2013. The capital account balances before recording revaluation are Abbott, $130,000; Casper $150,000; and Costello, $120,000. The effect of the revaluation is to increase Merchandise Inventory by $5,000 and the Building account balance by $20,000. How much cash will be paid to Costello? The increase to Costello's capital account as a result of the revaluation would be $10,000 (or ($5,000 + $20,000) x 40%), which will result in a new capital account balance of $130,000 (or $120,000 + $10,000). Since the partners have agreed that the retiring partner will be paid the balance of his account, Costello will receive $130,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 19-09 Account for the withdrawal of a partner from a partnership. Level: Medium Topic: Partnership Changes
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Chapter 19 - Accounting for Partnerships
Matching Questions
85. Match the accounting terms with the description by entering the proper number. 1. A member of a partnership who has unlimited liability 2. A financial statement prepared to summarize the changes in partners' capital accounts during an accounting period 3. An association of two or more persons who carry on, as co-owners, a business for profit 4. Another term for partnership agreement 5. An informational entry in the general journal 6. The legal term for termination of a partnership 7. A legal contract forming a partnership and specifying certain details of operation 8. The implication that a creditor can look to all partners' personal assets as well as the assets of the partnership for payment of the firm's debts 9. The amount of net income or net loss allocated to each partner 10. Termination of a business by distributing all assets and discontinuing the business 11. A partnership having one or more limited partners 12. A member of a partnership whose liability is limited to his or her investment in the partnership 13. The characteristic of a partnership by which each partner is empowered to act as an agent for the partnership, binding the firm by his or her acts Partnership
General partner 1
Distributive share 9 Partnership agreement 7 Unlimited liability 8 Limited partner 12 Dissolution 6 Memorandum entry 5
Mutual agency 13 Limited partnership 11 Liquidation 10 Statement of partners' equities 2 Articles of partnership 4
Partnership 3
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 19-01 Explain the major advantages and disadvantages of a partnership. Learning Objective: 19-02 State the important provisions that should be included in every partnership agreement. Learning Objective: 19-03 Account for the formation of a partnership. Learning Objective: 19-04 Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. Learning Objective: 19-05 Prepare a statement of partners' equities. Learning Objective: 19-06 Account for the revaluation of assets and liabilities prior to the dissolution of a partnership. Learning Objective: 19-07 Account for the sale of a partnership interest. Learning Objective: 19-08 Account for the investment of a new partner in an existing partnership. Learning Objective: 19-09 Account for the withdrawal of a partner from a partnership. Learning Objective: 19-10 Define the accounting terms new to this chapter. Level: Easy Topic: Forming a Partnership
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
Chapter 20 Corporations: Formation and Capital Stock Transactions True / False Questions
1. The stockholders of a corporation are agents of the corporation empowered to act for the firm. True False
2. Callable preferred stock is the stock of another firm that a corporation has purchased as an investment. True False
3. The conversion ratio is the number of shares of common stock for which a share of convertible preferred stock may be exchanged. True False
4. The ability to convert preferred stock to common stock can make the preferred stock less attractive to investors. True False
5. Before dividends can be paid, they must be declared and voted upon by the shareholders. True False
6. When common stock is issued, the par value, or stated value, of the shares issued is recorded in the Common Stock account. True False
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
7. Organization costs are carried indefinitely as an intangible asset in the records of the corporation. True False
8. Preferred Stock is shown in the Stockholders' Equity section of the balance sheet. True False
9. The amount received in excess of the par value of preferred stock issued is recorded in an account called Paid-in Capital in Excess of Par Value—Preferred Stock. True False
10. Stock is issued to investors at the time they sign the stock subscription contract. True False
11. Subscriptions Receivable is the control account for the subscribers' ledger. True False
12. The entry to record a subscription for 100 shares of common stock at par value would consist of a debit to Subscriptions Receivable—Common and a credit to Common Stock. True False
13. When shares of a corporation's stock are transferred from one investor to another, an entry is recorded in the capital stock transfer journal. True False
14. The stockholders' ledger for a class of stock is a subsidiary ledger, and the total shares shown must agree with the number of shares in the capital stock account for that class. True False
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
15. A separate Common Stock account is kept in the general ledger for each common stockholder of a corporation. True False
Fill in the Blank Questions
16. Stockholders are the ____________________ of a corporation. ________________________________________
17. In respect to corporate debt, stockholders have ____________________ liability. ________________________________________
18. Stocks may have a(n) ___________________, or stated, value. ________________________________________
19. Stock that carries special privileges or rights is called ____________________ stock. ________________________________________
20. If the issuing corporation retains the right to repurchase the shares of preferred stock from the stockholders at a specified price, the preferred stock is ___________________. ________________________________________
21. Ari Hightower owns 200 shares of preferred stock that is convertible into common stock at the rate of 3 shares for every share surrendered. If she surrenders all her preferred stock, she will have _____________________ shares of common stock. ________________________________________
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
22. Profits in the form of ____________________ are paid to the stockholders of a corporation. ________________________________________
23. If preferred stock is ____________________, its owners must receive the stated dividends for both the current year and any prior years in which the stated dividend was not paid before the common stockholders can receive any dividend. ________________________________________
24. The holder of a share of 12 percent, $100 par-value preferred stock would receive a dividend of ____________________ per share before any dividend was paid to common stockholders. ________________________________________
25. The balance of the Preferred Stock account represents the ____________________ value of the shares issued. ________________________________________
26. The amount paid for stock in excess of par value is called a(n) ___________________. ________________________________________
27. If a corporation sells 400 shares of 12 percent, $100 par-value preferred stock for $105 a share, the entry to record the transaction will include a credit of ____________________ to the Preferred Stock account. ________________________________________
28. A person who signs a(n) ____________________ contract agrees to purchase stock and pay for the shares at a later date. ________________________________________
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
29. The Common Stock Subscribed account has a(n) ____________________ balance. ________________________________________
30. The ___________________ accounts for all stock issued by a corporation and receives all cancelled and newly issued stock certificates from the transfer agent. ________________________________________
Multiple Choice Questions
31. A corporation is owned by A. the individual who started the company. B. its board of directors. C. the president of the corporation. D. its stockholders.
32. The stockholders of a corporation A. have no personal liability for the debts of the corporation. B. are agents of the corporation empowered to act for the firm. C. cannot sell their share of stock without obtaining the agreement of other stockholders. D. will receive a dividend each year.
33. One disadvantage of a corporation is A. limited liability. B. continuous existence. C. double taxation. D. transferability of ownership rights.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
34. Subchapter S corporations A. have the disadvantage of double taxation. B. require that shareholders report their share of profits on their partnership tax returns. C. have the advantage that shareholders can take part in policy and operating decisions. D. are entities formed as corporations but are treated essentially as a partnership so the corporation pays no income tax.
35. Which of the following statements is correct? A. Shareholders have personal liability for a corporation's debts. B. Shareholders must obtain the consent of other shareholders to sell their shares or buy more shares. C. Limited liability partnership (LLP) partners have liability for their own actions and the actions of those under their control or supervision. D. Shareholders are legally prohibited from acting as an officer or employee of a corporation.
36. Which of the following statements is correct? A. The owners of preferred stock are the only stockholders who have the right to vote. B. All stockholders are guaranteed the right to receive annual dividends. C. The issuing corporation may retain the right to repurchase shares of preferred stock from the stockholders at a specific price. D. In a liquidation, common shareholders are paid before preferred shareholders.
37. Common stockholders will receive a dividend A. in every year that the corporation is profitable. B. in every year that the board of directors declares a dividend. C. every year, whether the corporation is profitable or not. D. every year that profits exceed a stated amount.
38. When the issuing corporation retains the right to repurchase shares of preferred stock at a specified price, the preferred stock is said to be A. convertible. B. callable. C. participating. D. nonparticipating.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
39. If only one class of stock is issued by a corporation, it is referred to as A. preferred stock. B. company stock. C. treasury stock. D. common stock.
40. Which of the following statements is correct? A. Market value is the figure selected by the organizers of the corporation to be assigned to each share of stock for accounting purposes. B. If there is only one class of stock, the stock is called preferred stock. C. The authorized capital stock is the number of shares that have been issued and are still in the hands of stockholders. D. In the event of liquidation, preferred stockholders have a claim on assets before that of common stockholders.
41. A corporation has 1,000 shares of 10 percent, $50 par-value preferred stock and 10,000 shares of $5 par-value common stock outstanding. If the board of the directors decides to distribute dividends totaling $40,000, the common stockholders will receive a dividend of A. $5.00 a share. B. $4.00 a share. C. $3.50 a share. D. $3.75 a share.
42. A corporation has 2,000 shares of 10 percent, $50 par-value preferred stock and 20,000 shares of $5 par-value common stock outstanding. If the board of the directors decides to distribute dividends totaling $80,000, the common stockholders will receive a dividend of A. $3.50 a share. B. $7.50 a share. C. $8.00 a share. D. $10.00 a share.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
43. A corporation has 4,000 shares of 5 percent, $100 par-value preferred stock and 50,000 shares of $2 par-value common stock outstanding. If the board of the directors decides to distribute dividends totaling $100,000, the common stockholders will receive a dividend of A. $1.00 a share. B. $1.60 a share. C. $2.00 a share. D. $2.40 a share.
44. A corporation has 10,000 shares of 6 percent, $50 par-value cumulative preferred stock and 50,000 shares of $4 par-value common stock outstanding. Last year, no dividends were paid. This year, the board of directors decided to pay a dividend of $80,000. The common stockholders will receive a dividend of A. $0.40 a share. B. $1.00 a share. C. $1.60 a share. D. $2.00 a share.
45. A corporation has 10,000 shares of 6 percent, $50 par-value noncumulative preferred stock and 50,000 shares of $4 par-value common stock outstanding. Last year, no dividends were paid. This year, the board of directors decided to pay a dividend of $80,000. The common stockholders will receive a dividend of A. $0.40 a share. B. $1.00 a share. C. $1.60 a share. D. $2.00 a share.
46. Participating preferred stockholders A. receive dividends only after common stockholders have been paid dividends. B. receive preference dividend amounts as well as a share of other dividends paid. C. receive cumulative dividends if dividends are passed in previous years. D. give up their voting rights in exchange for dividend preferences.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
47. Organization costs should be A. treated as an operating expense when incurred. B. debited to an intangible asset account when incurred and systematically charged to expense over a period of up to 40 years. C. debited to an intangible asset account when incurred and carried at the original amount until the business ceases operations. D. debited to an intangible asset account when incurred and carried at the original amount until the business begins to earn a profit.
48. The Preferred Stock account is shown in the A. Assets section of the balance sheet. B. Current Liabilities section of the balance sheet. C. Long-Term Liabilities section of the balance sheet. D. Stockholders' Equity section of the balance sheet.
49. The Paid-in Capital in Excess of Par Value—Preferred Stock account would be shown in the A. Assets section of the balance sheet. B. Stockholders' Equity section of the balance sheet. C. Revenue section of the income statement. D. Expense section of the income statement.
50. Which of the following statements is not correct? A. The Paid-in Capital in Excess of Par Value—Common Stock account appears in the Stockholders' Equity section of the balance sheet. B. The Subscriptions Receivable account is shown in the Stockholders' Equity section of the balance sheet. C. The balance of the Common Stock account appears in the Stockholders' Equity section of the balance sheet. D. The balance of the Preferred Stock account appears in the Stockholders' Equity section of the balance sheet.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
51. The entry to record the issuance of 1,000 shares of $10 par-value common stock for $14 a share consists of a debit to Cash for $14,000 and a credit to Common Stock for A. $14,000. B. $10,000 and a credit to Gain on Sale of Common Stock for $4,000. C. $10,000 and a credit to Paid-in Capital in Excess of Par Value—Common Stock for $4,000. D. $10,000 and a credit to Treasury Stock for $4,000.
52. The entry to record the issuance of 2,000 shares of $10 par-value common stock for $14 a share consists of a debit to Cash for $28,000 and a credit to Common Stock for A. $28,000. B. $20,000 and a credit to Gain on Sale of Common Stock for $8,000. C. $20,000 and a credit to Treasury Stock for $8,000. D. $20,000 and a credit to Paid-in Capital in Excess of Par Value—Common Stock for $8,000.
53. The entry to record the issuance of 500 shares of $10 par-value common stock for $14 a share consists of a debit to Cash for $7,000 and a credit to Common Stock for A. $5,000 and a credit to Treasury Stock for $2,000. B. $5,000 and a credit to Paid-in Capital in Excess of Par Value—Common Stock for $2,000. C. $5,000 and a credit to Gain on Sale of Common Stock for $2,000. D. $7,000.
54. The entry to record the issuance of 1000 shares of $2 stated-value common stock for $10 a share consists of a debit to Cash for $10,000 and a credit to Common Stock for A. $10,000. B. $2,000 and a credit to Paid-in Capital in Excess of Par Value—Common Stock for $8,000. C. $2,000 and a credit to Paid-in Capital in Excess of Stated Value—Common Stock for $8,000. D. $2,000 and a credit to Gain On Sale of Common Stock for $8,000.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
55. A corporation received a subscription for 100 shares of 10 percent, $100 par-value preferred stock at $103 a share. The entry to record this transaction consists of a debit to Subscriptions Receivable—Preferred for $10,300 and a credit to A. Preferred Stock Subscribed for $10,300. B. Preferred Stock Subscribed for $10,000 and a credit to Gain on Sale of Preferred Stock for $300. C. Preferred Stock for $10,000 and a credit to Retained Earnings for $300. D. Preferred Stock Subscribed for $10,000 and a credit to Paid-in Capital in Excess of Par Value—Preferred Stock for $300.
56. A corporation received a subscription for 200 shares of 10 percent, $100 par-value preferred stock at $103 a share. The entry to record this transaction consists of a debit to Subscriptions Receivable—Preferred for $20,600 and a credit to A. Preferred Stock for $20,000 and a credit to Retained Earnings for $600. B. Preferred Stock Subscribed for $20,000 and a credit to Gain on Sale of Preferred Stock for $600. C. Preferred Stock Subscribed for $20,000 and a credit to Paid-in Capital in Excess of Par Value—Preferred Stock for $600. D. Preferred Stock Subscribed for $20,600.
57. A corporation received a subscription for 1,000 shares of 10 percent, $100 par-value preferred stock at $103 a share. The entry to record this transaction consists of a debit to Subscriptions Receivable—Preferred for $103,000 and a credit to A. Preferred Stock for $100,000 and a credit to Retained Earnings for $3,000. B. Preferred Stock Subscribed for $100,300. C. Preferred Stock Subscribed for $100,000 and a credit to Paid-in Capital in Excess of Par Value—Preferred Stock for $3,000. D. Preferred Stock Subscribed for $100,000 and a credit to Gain on Sale of Preferred Stock for $3,000.
58. An investor agrees to pay a preferred stock subscription in two monthly installments. Each collection will include a debit to Cash and a credit to A. Preferred Stock. B. Preferred Stock Subscribed. C. Subscriptions Receivable—Preferred. D. Common Stock Subscribed.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
59. The transfer of stock between shareholders is A. recorded in the general journal. B. recorded in the capital stock transfer journal. C. recorded in the minute book. D. not recorded by the corporation.
Short Answer Questions
60. Santorini Corporation has outstanding 300,000 shares of $70 par-value preferred stock, issued at an average price of $84 a share. The preferred stock is convertible into common stock at the rate of four shares of common stock for each share of preferred stock. Maryann Miller owns 880 shares of the preferred stock. During the current year she decides to convert 220 shares into common stock. How many shares of common stock will she receive?
61. Elsinore Corporation has outstanding 200,000 shares of $100 par-value preferred stock, issued at an average price of $110 a share. The preferred stock is convertible into common stock at the rate of five shares of common stock for each share of preferred stock. Louis Reynault owns 500 shares of the preferred stock. During the current year he decides to convert 225 shares into common stock. How many shares of common stock will he receive?
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
62. Venti Corporation has outstanding 100,000 shares of $50 par-value preferred stock, issued at an average price of $74 a share. The preferred stock is convertible into common stock at the rate of two shares of common stock for each share of preferred stock. Martin Spellman owns 100 shares of the preferred stock. During the current year he decides to convert 50 shares into common stock. How many shares of common stock will she receive?
63. The Northwest Corporation has outstanding 20,000 shares of 12 percent, $50 par-value, noncumulative, nonparticipating preferred stock and 80,000 shares of $10 par-value common stock. The board of directors voted to distribute $60,000 as dividends in 2013, $140,000 in 2014, and $200,000 in 2012. Compute the following: 1. Amount paid on each share of preferred stock in 2013. 2. Amount paid on each share of common stock in 2013. 3. Amount paid on each share of preferred stock in 2014. 4. Amount paid on each share of common stock in 2014. 5. Amount paid on each share of preferred stock in 2012. 6. Amount paid on each share of common stock in 2012.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
64. The Southeast Corporation has outstanding 40,000 shares of 12 percent, $50 par-value, noncumulative, nonparticipating preferred stock and 160,000 shares of $10 par-value common stock. The board of directors voted to distribute $240,000 as dividends in 2013, $280,000 in 2014, and $520,000 in 2012. Compute the following: 1. Amount paid on each share of preferred stock in 2013. 2. Amount paid on each share of common stock in 2013. 3. Amount paid on each share of preferred stock in 2014. 4. Amount paid on each share of common stock in 2014. 5. Amount paid on each share of preferred stock in 2012. 6. Amount paid on each share of common stock in 2012.
65. The Maynard Corporation has outstanding 10,000 shares of 10 percent, $50 par-value, cumulative, nonparticipating preferred stock and 80,000 shares of $10 par-value common stock. The board of directors voted to distribute $40,000 as dividends in 2013, $55,000 in 2014, and $65,000 in 2012. Compute the following: 1. Total dividend paid to preferred stockholders in 2013. 2. Total dividend paid to common stockholders in 2013. 3. Total dividend paid to preferred stockholders in 2014. 4. Total dividend paid to common stockholders in 2014. 5. Total dividend paid to preferred stockholders in 2012. 6. Total dividend paid to common stockholders in 2012.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
66. The Gibbs Corporation has outstanding 20,000 shares of 10 percent, $50 par-value, cumulative, nonparticipating preferred stock and 80,000 shares of $10 par-value common stock. The board of directors voted to distribute $80,000 as dividends in 2013, $110,000 in 2014, and $130,000 in 2012. Compute the following: 1. Total dividend paid to preferred stockholders in 2013. 2. Total dividend paid to common stockholders in 2013. 3. Total dividend paid to preferred stockholders in 2014. 4. Total dividend paid to common stockholders in 2014. 5. Total dividend paid to preferred stockholders in 2012. 6. Total dividend paid to common stockholders in 2012.
67. The Odegard Corporation has outstanding 50,000 shares of 6 percent, $100 par-value, noncumulative, nonparticipating preferred stock and 100,000 shares of $2 par-value common stock, sold at an average price of $20 per share. The board of directors voted to distribute $200,000 as dividends in 2013, $400,000 in 2014, and $450,000 in 2012. Compute the following: 1. Total dividend paid to preferred stockholders in 2013. 2. Total dividend paid to common stockholders in 2013. 3. Total dividend paid to preferred stockholders in 2014. 4. Total dividend paid to common stockholders in 2014. 5. Total dividend paid to preferred stockholders in 2012. 6. Total dividend paid to common stockholders in 2012.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
68. The Haines Corporation has outstanding 50,000 shares of 6 percent, $100 par-value, cumulative, nonparticipating preferred stock and 100,000 shares of $2 par-value common stock, sold at an average price of $20 per share. The board of directors voted to distribute $200,000 as dividends in 2013, $400,000 in 2014, and $450,000 in 2012. Compute the following: 1. Total dividend paid to preferred stockholders in 2013. 2. Total dividend paid to common stockholders in 2013. 3. Total dividend paid to preferred stockholders in 2014. 4. Total dividend paid to common stockholders in 2014. 5. Total dividend paid to preferred stockholders in 2012. 6. Total dividend paid to common stockholders in 2012.
69. Robert Schuler, the owner of a sole proprietorship, is planning to incorporate his business. His capital account has a balance of $100,000 after revaluation of the assets. His cash account totals $30,000. He will receive 10 percent, $10 par-value preferred stock with a total par value equal to the cash transferred. The balance of his capital is to be exchanged for shares of $20 par-value common stock with a total par value equal to the remaining capital. How many shares of preferred stock should be issued to Schuler? How many shares of common stock should be issued to Schuler?
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
70. Rukshad Patel, the owner of a sole proprietorship, is planning to incorporate her business. Her capital account has a balance of $200,000 after revaluation of the assets. Her cash account totals $60,000. She will receive 10 percent, $10 par-value preferred stock with a total par value equal to the cash transferred. The balance of her capital is to be exchanged for shares of $2 par-value common stock with a total par value equal to the remaining capital. How many shares of preferred stock should be issued to Patel? How many shares of common stock should be issued to Patel?
71. Chicagoland Landscape Company, a newly organized corporation, received a bill from its lawyers for $10,000 for time spent in organizing the company. 1. How should these costs be treated in the company's accounting records? Why? 2. How should they be treated for federal income tax purposes?
72. Cary Company, a newly organized corporation, received a bill from its lawyers for $7,500 for time spent in organizing the company. 1. How should these costs be treated for federal income tax purposes? 2. How should they be treated in the company's financial statements?
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
73. The Ventura Corporation, a new corporation, took over the assets and liabilities of the Jeremy Ruggers Company on January 2, 2013. The assets and liabilities assumed, after appropriate revaluation by Ruggers Company, are shown below.
The Ventura Corporation is authorized to issue 100,000 shares of $10 par-value common stock and 50,000 shares of 12 percent, $50 par-value preferred stock. Record the following transactions on page 1 of a general journal. Omit descriptions. Prepare the opening balance sheet for the corporation on January 2, 2013.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
74. Corning Corporation issued 1,000 shares of its $5 par-value common stock for cash at $13 a share. Record the issuance of the stock on page 1 of a general journal. Omit the description.
75. McDougall Corporation issued 40,000 shares of its $2 par-value common stock for cash at $20 a share. Record the issuance of the stock on page 1 of a general journal. Omit the description.
76. The Lompoc Corporation is authorized to issue 500,000 shares of $4 par-value common stock and 100,000 shares of 6 percent, $100 par-value preferred stock. Record the following transactions on page 1 of a general journal. Omit descriptions.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
77. Turque Corporation issued 4,000 shares of its no-par-value common stock (stated value, $20) for cash at $22 a share. Record the issuance of the stock on page 1 of a general journal. Omit the description.
78. Contreras Corporation issued 10,000 shares of its no-par-value common stock (stated value, $3) for cash at $30 a share. Record the issuance of the stock on page 1 of a general journal. Omit the description.
79. On July 1, 2013, Abbott Corporation received a subscription from Brad Jones for 1,200 shares of its $1 par-value common stock at a price of $20 a share. Jones made a payment of $10 per share on the stock at the time of the subscription. Record the receipt of the subscription and the cash payment on page 1 of a general journal. Then, using the same page of the general journal, record the payment of the balance of Jones' subscription and issuance of the stock on August 1, 2013. Omit the descriptions.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
80. The Mayfair Corporation was organized on August 1, 2013. The firm is authorized to issue 80,000 shares of no-par-value common stock with a stated value of $20 per share and 20,000 shares of $50 par-value, 12 percent preferred stock. Record the selected transactions on page 1 of a general journal. Omit descriptions.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
81. The Lilac Corporation was organized on January 1, 2013. The firm is authorized to issue 160,000 shares of no-par-value common stock with a stated value of $40 per share and 40,000 shares of $100 par-value, 12 percent preferred stock. Record the selected transactions on page 1 of a general journal. Omit descriptions.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
Matching Questions
82. Match the accounting terms with the description by entering the proper number.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
1. A person who owns shares of stock in a corporation; also called a stockholder 2. The corporate equivalent of owners' equity; also called shareholders' equity 3. Stock that is not assigned a par value in the corporate charter 4. Stock that conveys to its owners the stated preference dividend for the current year but no rights to dividends for years in which none were declared 5. The form by which capital stock is issued; the certificate indicates the name of the corporation, the name of the stockholder to whom the certificate was issued, the class of stock, and the number of shares 6. The guidelines for conducting a corporation's business affairs 7. Value of assets to be applied to preferred stock, usually par value or an amount in excess of par value, if the corporation is liquidated 8. A person or institution that handles all stock transfers and transfer records for a corporation 9. A basic or stated dividend rate for preferred stock that must be paid before dividends can be paid on common stock 10. Stock that gives the issuing corporation the right to repurchase the preferred shares from the stockholders at a specific price 11. A record of stock transfers used for posting to the stockholders' ledger 12. An amount assigned by the corporate charter to each share of stock for accounting purposes 13. Stock that conveys to its owners the right to receive the preference dividend for the current year and any prior years in which the preference dividend was not paid before common stockholders receive any dividends 14. A subsidiary ledger that contains an account receivable for each stock subscriber 15. Stock that conveys the right not only to the preference dividend amount but also to a share of other dividends paid 16. A partnership that provides limited liability for all partners 17. The costs associated with establishing a corporation
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Subscribers' ledger ____ Convertible preferred stock ____ Preference dividend ____
Nonparticipating preferred stock ____
Transfer agent ____ Organization costs ____
Corporate charter ____ Par value ____ Participating preferred stock ____
Subscription book ____ Preemptive right ____ Cumulative preferred stock ____
Dividends ____ Limited liability company (LLC) ____
Bylaws ____ Common stock ____ Authorized capital stock ____
Chapter 20 - Corporations: Formation and Capital Stock Transactions
18. Preferred stock that conveys the right to convert that stock to common stock after a specified date or during a period of time 19. A subsidiary ledger that contains a record of each stockholder's purchases, transfers, and current balance of shares owned; also called stockholders' ledger 20. A shareholder's right to purchase a proportionate amount of any new stock issued at a later date 21. A document issued by a state government that establishes a corporation 22. Stock that conveys to its owners the right to only the preference dividend amount specified on the stock certificate 23. A book in which accurate and complete records of all meetings of stockholders and directors are kept 24. The price per share at which stock is bought and sold 25. The general class of stock issued when no other class of stock is authorized; each share carries the same rights and privileges as every other share. Even if preferred stock is issued, common stock will also be issued 26. A person or institution in charge of the issuance and transfer of a corporation's stock 27. The number of shares authorized for issue by the corporate charter 28. Distributions of the profits of a corporation to its shareholders 29. The value that can be assigned to no-par-value stock by a board of directors for accounting purposes 30. An entity formed as a corporation that meets the requirements of Subchapter S of the Internal Revenue Code to be treated essentially as a partnership, so that the corporation pays no income tax 31. A list of the stock subscriptions received 32. A class of stock that has special claims on the corporate profits or, in case of liquidation, on corporate assets
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Limited liability partnership (LLP) ____
Callable preferred stock ____
No-par-value stock ____ Preferred stock ____
Registrar ____
Shareholder ____ Stockholders' equity ____
Stock certificate ____ Stated value ____ Capital stock transfer journal ____ Liquidation value ____
Market value ____
Capital stock ledger ____ Stockholders' ledger ____
Capital stock ledger ____
Chapter 20 - Corporations: Formation and Capital Stock Transactions
33. Provides limited liability to the owners, who can elect to have the profits taxed at the LLC level or on their individual tax returns 34. Another term for capital stock ledger
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Noncumulative preferred stock ____ Subchapter S corporation (S) ____
Chapter 20 - Corporations: Formation and Capital Stock Transactions
Chapter 20 Corporations: Formation and Capital Stock Transactions Answer Key
True / False Questions
1. The stockholders of a corporation are agents of the corporation empowered to act for the firm. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 20-01 Explain the characteristics of a corporation. Level: Easy Topic: Forming a Corporation
2. Callable preferred stock is the stock of another firm that a corporation has purchased as an investment. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-03 Describe the different types of stock. Level: Easy Topic: Types of Capital Stock
3. The conversion ratio is the number of shares of common stock for which a share of convertible preferred stock may be exchanged. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 20-03 Describe the different types of stock. Level: Easy Topic: Types of Capital Stock
20-27
Chapter 20 - Corporations: Formation and Capital Stock Transactions
4. The ability to convert preferred stock to common stock can make the preferred stock less attractive to investors. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 20-04 Compute the number of shares of common stock to be issued on the conversion of convertible preferred stock. Level: Easy Topic: Types of Capital Stock
5. Before dividends can be paid, they must be declared and voted upon by the shareholders. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 20-05 Compute dividends payable on stock. Level: Easy Topic: Types of Capital Stock
6. When common stock is issued, the par value, or stated value, of the shares issued is recorded in the Common Stock account. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-06 Record the issuance of capital stock at par value. Level: Easy Topic: Recording Capital Stock Transactions
7. Organization costs are carried indefinitely as an intangible asset in the records of the corporation. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-07 Prepare a balance sheet for a corporation. Level: Easy Topic: Recording Capital Stock Transactions
20-28
Chapter 20 - Corporations: Formation and Capital Stock Transactions
8. Preferred Stock is shown in the Stockholders' Equity section of the balance sheet. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-08 Record organization costs. Level: Easy Topic: Recording Capital Stock Transactions
9. The amount received in excess of the par value of preferred stock issued is recorded in an account called Paid-in Capital in Excess of Par Value—Preferred Stock. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-09 Record stock issued at a premium and stock with no par value. Level: Easy Topic: Recording Capital Stock Transactions
10. Stock is issued to investors at the time they sign the stock subscription contract. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 20-10 Record transactions for stock subscriptions. Level: Easy Topic: Recording Capital Stock Transactions
11. Subscriptions Receivable is the control account for the subscribers' ledger. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-10 Record transactions for stock subscriptions. Level: Easy Topic: Recording Capital Stock Transactions
20-29
Chapter 20 - Corporations: Formation and Capital Stock Transactions
12. The entry to record a subscription for 100 shares of common stock at par value would consist of a debit to Subscriptions Receivable—Common and a credit to Common Stock. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-10 Record transactions for stock subscriptions. Level: Easy Topic: Recording Capital Stock Transactions
13. When shares of a corporation's stock are transferred from one investor to another, an entry is recorded in the capital stock transfer journal. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-11 Describe the capital stock records for a corporation. Level: Easy Topic: Recording Capital Stock Transactions
14. The stockholders' ledger for a class of stock is a subsidiary ledger, and the total shares shown must agree with the number of shares in the capital stock account for that class. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-11 Describe the capital stock records for a corporation. Level: Easy Topic: Recording Capital Stock Transactions
20-30
Chapter 20 - Corporations: Formation and Capital Stock Transactions
15. A separate Common Stock account is kept in the general ledger for each common stockholder of a corporation. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-06 Record the issuance of capital stock at par value. Learning Objective: 20-11 Describe the capital stock records for a corporation. Level: Easy Topic: Recording Capital Stock Transactions
Fill in the Blank Questions
16. Stockholders are the ____________________ of a corporation. owners
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 20-01 Explain the characteristics of a corporation. Level: Easy Topic: Forming a Corporation
17. In respect to corporate debt, stockholders have ____________________ liability. limited
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 20-01 Explain the characteristics of a corporation. Level: Easy Topic: Forming a Corporation
20-31
Chapter 20 - Corporations: Formation and Capital Stock Transactions
18. Stocks may have a(n) ___________________, or stated, value. par
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 20-03 Describe the different types of stock. Level: Easy Topic: Types of Capital Stock
19. Stock that carries special privileges or rights is called ____________________ stock. preferred
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 20-03 Describe the different types of stock. Level: Easy Topic: Types of Capital Stock
20. If the issuing corporation retains the right to repurchase the shares of preferred stock from the stockholders at a specified price, the preferred stock is ___________________. callable
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 20-03 Describe the different types of stock. Level: Easy Topic: Types of Capital Stock
21. Ari Hightower owns 200 shares of preferred stock that is convertible into common stock at the rate of 3 shares for every share surrendered. If she surrenders all her preferred stock, she will have _____________________ shares of common stock. 600
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-04 Compute the number of shares of common stock to be issued on the conversion of convertible preferred stock. Level: Medium Topic: Types of Capital Stock
20-32
Chapter 20 - Corporations: Formation and Capital Stock Transactions
22. Profits in the form of ____________________ are paid to the stockholders of a corporation. dividends
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 20-01 Explain the characteristics of a corporation. Learning Objective: 20-05 Compute dividends payable on stock. Level: Easy Topic: Forming a Corporation Topic: Types of Capital Stock
23. If preferred stock is ____________________, its owners must receive the stated dividends for both the current year and any prior years in which the stated dividend was not paid before the common stockholders can receive any dividend. cumulative
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 20-05 Compute dividends payable on stock. Level: Easy Topic: Types of Capital Stock
24. The holder of a share of 12 percent, $100 par-value preferred stock would receive a dividend of ____________________ per share before any dividend was paid to common stockholders. $12
AACSB: Analytic AICPA BB: Legal Bloom's: Apply Learning Objective: 20-05 Compute dividends payable on stock. Level: Medium Topic: Types of Capital Stock
20-33
Chapter 20 - Corporations: Formation and Capital Stock Transactions
25. The balance of the Preferred Stock account represents the ____________________ value of the shares issued. par
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-06 Record the issuance of capital stock at par value. Level: Easy Topic: Recording Capital Stock Transactions
26. The amount paid for stock in excess of par value is called a(n) ___________________. premium
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-09 Record stock issued at a premium and stock with no par value. Level: Easy Topic: Recording Capital Stock Transactions
27. If a corporation sells 400 shares of 12 percent, $100 par-value preferred stock for $105 a share, the entry to record the transaction will include a credit of ____________________ to the Preferred Stock account. $40,000
AACSB: Analytic AICPA BB: Legal Bloom's: Apply Learning Objective: 20-09 Record stock issued at a premium and stock with no par value. Level: Medium Topic: Recording Capital Stock Transactions
28. A person who signs a(n) ____________________ contract agrees to purchase stock and pay for the shares at a later date. subscription
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-10 Record transactions for stock subscriptions. Level: Easy Topic: Recording Capital Stock Transactions
20-34
Chapter 20 - Corporations: Formation and Capital Stock Transactions
29. The Common Stock Subscribed account has a(n) ____________________ balance. credit
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-10 Record transactions for stock subscriptions. Level: Easy Topic: Recording Capital Stock Transactions
30. The ___________________ accounts for all stock issued by a corporation and receives all cancelled and newly issued stock certificates from the transfer agent. registrar
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-11 Describe the capital stock records for a corporation. Level: Easy Topic: Recording Capital Stock Transactions
Multiple Choice Questions
31. A corporation is owned by A. the individual who started the company. B. its board of directors. C. the president of the corporation. D. its stockholders.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 20-01 Explain the characteristics of a corporation. Level: Easy Topic: Forming a Corporation
20-35
Chapter 20 - Corporations: Formation and Capital Stock Transactions
32. The stockholders of a corporation A. have no personal liability for the debts of the corporation. B. are agents of the corporation empowered to act for the firm. C. cannot sell their share of stock without obtaining the agreement of other stockholders. D. will receive a dividend each year.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 20-01 Explain the characteristics of a corporation. Level: Easy Topic: Forming a Corporation
33. One disadvantage of a corporation is A. limited liability. B. continuous existence. C. double taxation. D. transferability of ownership rights.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 20-01 Explain the characteristics of a corporation. Level: Easy Topic: Forming a Corporation
34. Subchapter S corporations A. have the disadvantage of double taxation. B. require that shareholders report their share of profits on their partnership tax returns. C. have the advantage that shareholders can take part in policy and operating decisions. D. are entities formed as corporations but are treated essentially as a partnership so the corporation pays no income tax.
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 20-02 Describe special "hybrid" organizations that have some characteristics of partnerships and some characteristics of corporations. Level: Easy Topic: Forming a Corporation
20-36
Chapter 20 - Corporations: Formation and Capital Stock Transactions
35. Which of the following statements is correct? A. Shareholders have personal liability for a corporation's debts. B. Shareholders must obtain the consent of other shareholders to sell their shares or buy more shares. C. Limited liability partnership (LLP) partners have liability for their own actions and the actions of those under their control or supervision. D. Shareholders are legally prohibited from acting as an officer or employee of a corporation.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 20-01 Explain the characteristics of a corporation. Learning Objective: 20-02 Describe special "hybrid" organizations that have some characteristics of partnerships and some characteristics of corporations. Level: Easy Topic: Forming a Corporation
36. Which of the following statements is correct? A. The owners of preferred stock are the only stockholders who have the right to vote. B. All stockholders are guaranteed the right to receive annual dividends. C. The issuing corporation may retain the right to repurchase shares of preferred stock from the stockholders at a specific price. D. In a liquidation, common shareholders are paid before preferred shareholders.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 20-03 Describe the different types of stock. Level: Easy Topic: Types of Capital Stock
37. Common stockholders will receive a dividend A. in every year that the corporation is profitable. B. in every year that the board of directors declares a dividend. C. every year, whether the corporation is profitable or not. D. every year that profits exceed a stated amount.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 20-03 Describe the different types of stock. Level: Easy Topic: Types of Capital Stock
20-37
Chapter 20 - Corporations: Formation and Capital Stock Transactions
38. When the issuing corporation retains the right to repurchase shares of preferred stock at a specified price, the preferred stock is said to be A. convertible. B. callable. C. participating. D. nonparticipating.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-03 Describe the different types of stock. Level: Easy Topic: Types of Capital Stock
39. If only one class of stock is issued by a corporation, it is referred to as A. preferred stock. B. company stock. C. treasury stock. D. common stock.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 20-03 Describe the different types of stock. Level: Easy Topic: Types of Capital Stock
40. Which of the following statements is correct? A. Market value is the figure selected by the organizers of the corporation to be assigned to each share of stock for accounting purposes. B. If there is only one class of stock, the stock is called preferred stock. C. The authorized capital stock is the number of shares that have been issued and are still in the hands of stockholders. D. In the event of liquidation, preferred stockholders have a claim on assets before that of common stockholders.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 20-03 Describe the different types of stock. Level: Easy Topic: Types of Capital Stock
20-38
Chapter 20 - Corporations: Formation and Capital Stock Transactions
41. A corporation has 1,000 shares of 10 percent, $50 par-value preferred stock and 10,000 shares of $5 par-value common stock outstanding. If the board of the directors decides to distribute dividends totaling $40,000, the common stockholders will receive a dividend of A. $5.00 a share. B. $4.00 a share. C. $3.50 a share. D. $3.75 a share.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-05 Compute dividends payable on stock. Level: Medium Topic: Types of Capital Stock
42. A corporation has 2,000 shares of 10 percent, $50 par-value preferred stock and 20,000 shares of $5 par-value common stock outstanding. If the board of the directors decides to distribute dividends totaling $80,000, the common stockholders will receive a dividend of A. $3.50 a share. B. $7.50 a share. C. $8.00 a share. D. $10.00 a share.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-05 Compute dividends payable on stock. Level: Medium Topic: Types of Capital Stock
20-39
Chapter 20 - Corporations: Formation and Capital Stock Transactions
43. A corporation has 4,000 shares of 5 percent, $100 par-value preferred stock and 50,000 shares of $2 par-value common stock outstanding. If the board of the directors decides to distribute dividends totaling $100,000, the common stockholders will receive a dividend of A. $1.00 a share. B. $1.60 a share. C. $2.00 a share. D. $2.40 a share.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-05 Compute dividends payable on stock. Level: Medium Topic: Types of Capital Stock
44. A corporation has 10,000 shares of 6 percent, $50 par-value cumulative preferred stock and 50,000 shares of $4 par-value common stock outstanding. Last year, no dividends were paid. This year, the board of directors decided to pay a dividend of $80,000. The common stockholders will receive a dividend of A. $0.40 a share. B. $1.00 a share. C. $1.60 a share. D. $2.00 a share.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-05 Compute dividends payable on stock. Level: Medium Topic: Types of Capital Stock
20-40
Chapter 20 - Corporations: Formation and Capital Stock Transactions
45. A corporation has 10,000 shares of 6 percent, $50 par-value noncumulative preferred stock and 50,000 shares of $4 par-value common stock outstanding. Last year, no dividends were paid. This year, the board of directors decided to pay a dividend of $80,000. The common stockholders will receive a dividend of A. $0.40 a share. B. $1.00 a share. C. $1.60 a share. D. $2.00 a share.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-05 Compute dividends payable on stock. Level: Medium Topic: Types of Capital Stock
46. Participating preferred stockholders A. receive dividends only after common stockholders have been paid dividends. B. receive preference dividend amounts as well as a share of other dividends paid. C. receive cumulative dividends if dividends are passed in previous years. D. give up their voting rights in exchange for dividend preferences.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 20-03 Describe the different types of stock. Learning Objective: 20-05 Compute dividends payable on stock. Level: Easy Topic: Types of Capital Stock
20-41
Chapter 20 - Corporations: Formation and Capital Stock Transactions
47. Organization costs should be A. treated as an operating expense when incurred. B. debited to an intangible asset account when incurred and systematically charged to expense over a period of up to 40 years. C. debited to an intangible asset account when incurred and carried at the original amount until the business ceases operations. D. debited to an intangible asset account when incurred and carried at the original amount until the business begins to earn a profit.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 20-07 Prepare a balance sheet for a corporation. Level: Easy Topic: Recording Capital Stock Transactions
48. The Preferred Stock account is shown in the A. Assets section of the balance sheet. B. Current Liabilities section of the balance sheet. C. Long-Term Liabilities section of the balance sheet. D. Stockholders' Equity section of the balance sheet.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 20-08 Record organization costs. Level: Easy Topic: Recording Capital Stock Transactions
49. The Paid-in Capital in Excess of Par Value—Preferred Stock account would be shown in the A. Assets section of the balance sheet. B. Stockholders' Equity section of the balance sheet. C. Revenue section of the income statement. D. Expense section of the income statement.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 20-08 Record organization costs. Level: Easy Topic: Recording Capital Stock Transactions
20-42
Chapter 20 - Corporations: Formation and Capital Stock Transactions
50. Which of the following statements is not correct? A. The Paid-in Capital in Excess of Par Value—Common Stock account appears in the Stockholders' Equity section of the balance sheet. B. The Subscriptions Receivable account is shown in the Stockholders' Equity section of the balance sheet. C. The balance of the Common Stock account appears in the Stockholders' Equity section of the balance sheet. D. The balance of the Preferred Stock account appears in the Stockholders' Equity section of the balance sheet.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 20-08 Record organization costs. Level: Easy Topic: Recording Capital Stock Transactions
51. The entry to record the issuance of 1,000 shares of $10 par-value common stock for $14 a share consists of a debit to Cash for $14,000 and a credit to Common Stock for A. $14,000. B. $10,000 and a credit to Gain on Sale of Common Stock for $4,000. C. $10,000 and a credit to Paid-in Capital in Excess of Par Value—Common Stock for $4,000. D. $10,000 and a credit to Treasury Stock for $4,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-09 Record stock issued at a premium and stock with no par value. Level: Medium Topic: Recording Capital Stock Transactions
20-43
Chapter 20 - Corporations: Formation and Capital Stock Transactions
52. The entry to record the issuance of 2,000 shares of $10 par-value common stock for $14 a share consists of a debit to Cash for $28,000 and a credit to Common Stock for A. $28,000. B. $20,000 and a credit to Gain on Sale of Common Stock for $8,000. C. $20,000 and a credit to Treasury Stock for $8,000. D. $20,000 and a credit to Paid-in Capital in Excess of Par Value—Common Stock for $8,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-09 Record stock issued at a premium and stock with no par value. Level: Medium Topic: Recording Capital Stock Transactions
53. The entry to record the issuance of 500 shares of $10 par-value common stock for $14 a share consists of a debit to Cash for $7,000 and a credit to Common Stock for A. $5,000 and a credit to Treasury Stock for $2,000. B. $5,000 and a credit to Paid-in Capital in Excess of Par Value—Common Stock for $2,000. C. $5,000 and a credit to Gain on Sale of Common Stock for $2,000. D. $7,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-09 Record stock issued at a premium and stock with no par value. Level: Medium Topic: Recording Capital Stock Transactions
54. The entry to record the issuance of 1000 shares of $2 stated-value common stock for $10 a share consists of a debit to Cash for $10,000 and a credit to Common Stock for A. $10,000. B. $2,000 and a credit to Paid-in Capital in Excess of Par Value—Common Stock for $8,000. C. $2,000 and a credit to Paid-in Capital in Excess of Stated Value—Common Stock for $8,000. D. $2,000 and a credit to Gain On Sale of Common Stock for $8,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-09 Record stock issued at a premium and stock with no par value. Level: Medium Topic: Recording Capital Stock Transactions
20-44
Chapter 20 - Corporations: Formation and Capital Stock Transactions
55. A corporation received a subscription for 100 shares of 10 percent, $100 par-value preferred stock at $103 a share. The entry to record this transaction consists of a debit to Subscriptions Receivable—Preferred for $10,300 and a credit to A. Preferred Stock Subscribed for $10,300. B. Preferred Stock Subscribed for $10,000 and a credit to Gain on Sale of Preferred Stock for $300. C. Preferred Stock for $10,000 and a credit to Retained Earnings for $300. D. Preferred Stock Subscribed for $10,000 and a credit to Paid-in Capital in Excess of Par Value—Preferred Stock for $300.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-10 Record transactions for stock subscriptions. Level: Medium Topic: Recording Capital Stock Transactions
56. A corporation received a subscription for 200 shares of 10 percent, $100 par-value preferred stock at $103 a share. The entry to record this transaction consists of a debit to Subscriptions Receivable—Preferred for $20,600 and a credit to A. Preferred Stock for $20,000 and a credit to Retained Earnings for $600. B. Preferred Stock Subscribed for $20,000 and a credit to Gain on Sale of Preferred Stock for $600. C. Preferred Stock Subscribed for $20,000 and a credit to Paid-in Capital in Excess of Par Value—Preferred Stock for $600. D. Preferred Stock Subscribed for $20,600.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-10 Record transactions for stock subscriptions. Level: Medium Topic: Recording Capital Stock Transactions
20-45
Chapter 20 - Corporations: Formation and Capital Stock Transactions
57. A corporation received a subscription for 1,000 shares of 10 percent, $100 par-value preferred stock at $103 a share. The entry to record this transaction consists of a debit to Subscriptions Receivable—Preferred for $103,000 and a credit to A. Preferred Stock for $100,000 and a credit to Retained Earnings for $3,000. B. Preferred Stock Subscribed for $100,300. C. Preferred Stock Subscribed for $100,000 and a credit to Paid-in Capital in Excess of Par Value—Preferred Stock for $3,000. D. Preferred Stock Subscribed for $100,000 and a credit to Gain on Sale of Preferred Stock for $3,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-10 Record transactions for stock subscriptions. Level: Medium Topic: Recording Capital Stock Transactions
58. An investor agrees to pay a preferred stock subscription in two monthly installments. Each collection will include a debit to Cash and a credit to A. Preferred Stock. B. Preferred Stock Subscribed. C. Subscriptions Receivable—Preferred. D. Common Stock Subscribed.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 20-10 Record transactions for stock subscriptions. Level: Easy Topic: Recording Capital Stock Transactions
59. The transfer of stock between shareholders is A. recorded in the general journal. B. recorded in the capital stock transfer journal. C. recorded in the minute book. D. not recorded by the corporation.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 20-11 Describe the capital stock records for a corporation. Level: Easy Topic: Recording Capital Stock Transactions
20-46
Chapter 20 - Corporations: Formation and Capital Stock Transactions
Short Answer Questions
60. Santorini Corporation has outstanding 300,000 shares of $70 par-value preferred stock, issued at an average price of $84 a share. The preferred stock is convertible into common stock at the rate of four shares of common stock for each share of preferred stock. Maryann Miller owns 880 shares of the preferred stock. During the current year she decides to convert 220 shares into common stock. How many shares of common stock will she receive? 880 shares Feedback: 880 = 220 x 4.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-04 Compute the number of shares of common stock to be issued on the conversion of convertible preferred stock. Level: Medium Topic: Types of Capital Stock
61. Elsinore Corporation has outstanding 200,000 shares of $100 par-value preferred stock, issued at an average price of $110 a share. The preferred stock is convertible into common stock at the rate of five shares of common stock for each share of preferred stock. Louis Reynault owns 500 shares of the preferred stock. During the current year he decides to convert 225 shares into common stock. How many shares of common stock will he receive? 1125 shares Feedback: 1125 = 225 x 5.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-04 Compute the number of shares of common stock to be issued on the conversion of convertible preferred stock. Level: Medium Topic: Types of Capital Stock
20-47
Chapter 20 - Corporations: Formation and Capital Stock Transactions
62. Venti Corporation has outstanding 100,000 shares of $50 par-value preferred stock, issued at an average price of $74 a share. The preferred stock is convertible into common stock at the rate of two shares of common stock for each share of preferred stock. Martin Spellman owns 100 shares of the preferred stock. During the current year he decides to convert 50 shares into common stock. How many shares of common stock will she receive? 100 shares
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-04 Compute the number of shares of common stock to be issued on the conversion of convertible preferred stock. Level: Medium Topic: Types of Capital Stock
63. The Northwest Corporation has outstanding 20,000 shares of 12 percent, $50 par-value, noncumulative, nonparticipating preferred stock and 80,000 shares of $10 par-value common stock. The board of directors voted to distribute $60,000 as dividends in 2013, $140,000 in 2014, and $200,000 in 2012. Compute the following: 1. Amount paid on each share of preferred stock in 2013. 2. Amount paid on each share of common stock in 2013. 3. Amount paid on each share of preferred stock in 2014. 4. Amount paid on each share of common stock in 2014. 5. Amount paid on each share of preferred stock in 2012. 6. Amount paid on each share of common stock in 2012. 1. $3.00; 2. zero; 3. $6.00; 4. $0.25; 5. $6.00; 6. $1.00
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-05 Compute dividends payable on stock. Level: Medium Topic: Types of Capital Stock
20-48
Chapter 20 - Corporations: Formation and Capital Stock Transactions
64. The Southeast Corporation has outstanding 40,000 shares of 12 percent, $50 par-value, noncumulative, nonparticipating preferred stock and 160,000 shares of $10 par-value common stock. The board of directors voted to distribute $240,000 as dividends in 2013, $280,000 in 2014, and $520,000 in 2012. Compute the following: 1. Amount paid on each share of preferred stock in 2013. 2. Amount paid on each share of common stock in 2013. 3. Amount paid on each share of preferred stock in 2014. 4. Amount paid on each share of common stock in 2014. 5. Amount paid on each share of preferred stock in 2012. 6. Amount paid on each share of common stock in 2012. 1. $6.00; 2. zero; 3. $6.00; 4. $0.25; 5. $6.00; 6. $1.75
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-05 Compute dividends payable on stock. Level: Medium Topic: Types of Capital Stock
20-49
Chapter 20 - Corporations: Formation and Capital Stock Transactions
65. The Maynard Corporation has outstanding 10,000 shares of 10 percent, $50 par-value, cumulative, nonparticipating preferred stock and 80,000 shares of $10 par-value common stock. The board of directors voted to distribute $40,000 as dividends in 2013, $55,000 in 2014, and $65,000 in 2012. Compute the following: 1. Total dividend paid to preferred stockholders in 2013. 2. Total dividend paid to common stockholders in 2013. 3. Total dividend paid to preferred stockholders in 2014. 4. Total dividend paid to common stockholders in 2014. 5. Total dividend paid to preferred stockholders in 2012. 6. Total dividend paid to common stockholders in 2012. 1. $40,000; 2. zero; 3. $55,000; 4. zero; 5. $55,000; 6. $10,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-05 Compute dividends payable on stock. Level: Medium Topic: Types of Capital Stock
20-50
Chapter 20 - Corporations: Formation and Capital Stock Transactions
66. The Gibbs Corporation has outstanding 20,000 shares of 10 percent, $50 par-value, cumulative, nonparticipating preferred stock and 80,000 shares of $10 par-value common stock. The board of directors voted to distribute $80,000 as dividends in 2013, $110,000 in 2014, and $130,000 in 2012. Compute the following: 1. Total dividend paid to preferred stockholders in 2013. 2. Total dividend paid to common stockholders in 2013. 3. Total dividend paid to preferred stockholders in 2014. 4. Total dividend paid to common stockholders in 2014. 5. Total dividend paid to preferred stockholders in 2012. 6. Total dividend paid to common stockholders in 2012. 1. $80,000; 2. zero; 3. $110,000; 4. zero; 5. $110,000; 6. $20,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-05 Compute dividends payable on stock. Level: Medium Topic: Types of Capital Stock
20-51
Chapter 20 - Corporations: Formation and Capital Stock Transactions
67. The Odegard Corporation has outstanding 50,000 shares of 6 percent, $100 par-value, noncumulative, nonparticipating preferred stock and 100,000 shares of $2 par-value common stock, sold at an average price of $20 per share. The board of directors voted to distribute $200,000 as dividends in 2013, $400,000 in 2014, and $450,000 in 2012. Compute the following: 1. Total dividend paid to preferred stockholders in 2013. 2. Total dividend paid to common stockholders in 2013. 3. Total dividend paid to preferred stockholders in 2014. 4. Total dividend paid to common stockholders in 2014. 5. Total dividend paid to preferred stockholders in 2012. 6. Total dividend paid to common stockholders in 2012. 1. $200,000; 2. zero; 3. $300,000; 4. 100,000; 5. $300,000; 6. $150,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-05 Compute dividends payable on stock. Level: Medium Topic: Types of Capital Stock
20-52
Chapter 20 - Corporations: Formation and Capital Stock Transactions
68. The Haines Corporation has outstanding 50,000 shares of 6 percent, $100 par-value, cumulative, nonparticipating preferred stock and 100,000 shares of $2 par-value common stock, sold at an average price of $20 per share. The board of directors voted to distribute $200,000 as dividends in 2013, $400,000 in 2014, and $450,000 in 2012. Compute the following: 1. Total dividend paid to preferred stockholders in 2013. 2. Total dividend paid to common stockholders in 2013. 3. Total dividend paid to preferred stockholders in 2014. 4. Total dividend paid to common stockholders in 2014. 5. Total dividend paid to preferred stockholders in 2012. 6. Total dividend paid to common stockholders in 2012. 1. $200,000; 2. zero; 3. $400,000; 4. zero; 5. $300,000; 6. $150,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-05 Compute dividends payable on stock. Level: Medium Topic: Types of Capital Stock
69. Robert Schuler, the owner of a sole proprietorship, is planning to incorporate his business. His capital account has a balance of $100,000 after revaluation of the assets. His cash account totals $30,000. He will receive 10 percent, $10 par-value preferred stock with a total par value equal to the cash transferred. The balance of his capital is to be exchanged for shares of $20 par-value common stock with a total par value equal to the remaining capital. How many shares of preferred stock should be issued to Schuler? How many shares of common stock should be issued to Schuler? Preferred stock received, 3,000 shares; Common stock received, 3,500 shares
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-06 Record the issuance of capital stock at par value. Level: Medium Topic: Recording Capital Stock Transactions
20-53
Chapter 20 - Corporations: Formation and Capital Stock Transactions
70. Rukshad Patel, the owner of a sole proprietorship, is planning to incorporate her business. Her capital account has a balance of $200,000 after revaluation of the assets. Her cash account totals $60,000. She will receive 10 percent, $10 par-value preferred stock with a total par value equal to the cash transferred. The balance of her capital is to be exchanged for shares of $2 par-value common stock with a total par value equal to the remaining capital. How many shares of preferred stock should be issued to Patel? How many shares of common stock should be issued to Patel? Preferred stock received, 6,000 shares; Common stock received, 70,000 shares
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-06 Record the issuance of capital stock at par value. Level: Medium Topic: Recording Capital Stock Transactions
71. Chicagoland Landscape Company, a newly organized corporation, received a bill from its lawyers for $10,000 for time spent in organizing the company. 1. How should these costs be treated in the company's accounting records? Why? 2. How should they be treated for federal income tax purposes? 1. Generally, organization costs are charged to expense when they are incurred. It is difficult to evaluate organization costs and to determine the period that they will be of benefit. 2. For federal income tax purposes, the minimum period to amortize these costs is 60 months; the maximum is 40 years.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-08 Record organization costs. Level: Medium Topic: Recording Capital Stock Transactions
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
72. Cary Company, a newly organized corporation, received a bill from its lawyers for $7,500 for time spent in organizing the company. 1. How should these costs be treated for federal income tax purposes? 2. How should they be treated in the company's financial statements? 1. For federal income tax purposes, the minimum period to amortize these costs is 60 months; the maximum is 40 years. 2. Generally, organization costs are charged to expense when they are incurred. As such, the organization costs would be reported on the income statement.
AACSB: Analytic AICPA BB: Legal Bloom's: Apply Learning Objective: 20-08 Record organization costs. Level: Medium Topic: Recording Capital Stock Transactions
20-55
Chapter 20 - Corporations: Formation and Capital Stock Transactions
73. The Ventura Corporation, a new corporation, took over the assets and liabilities of the Jeremy Ruggers Company on January 2, 2013. The assets and liabilities assumed, after appropriate revaluation by Ruggers Company, are shown below.
The Ventura Corporation is authorized to issue 100,000 shares of $10 par-value common stock and 50,000 shares of 12 percent, $50 par-value preferred stock. Record the following transactions on page 1 of a general journal. Omit descriptions. Prepare the opening balance sheet for the corporation on January 2, 2013.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-05 Compute dividends payable on stock. Learning Objective: 20-06 Record the issuance of capital stock at par value. Learning Objective: 20-07 Prepare a balance sheet for a corporation. Learning Objective: 20-08 Record organization costs. Level: Medium Topic: Recording Capital Stock Transactions Topic: Types of Capital Stock
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
74. Corning Corporation issued 1,000 shares of its $5 par-value common stock for cash at $13 a share. Record the issuance of the stock on page 1 of a general journal. Omit the description.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-09 Record stock issued at a premium and stock with no par value. Level: Medium Topic: Recording Capital Stock Transactions
20-59
Chapter 20 - Corporations: Formation and Capital Stock Transactions
75. McDougall Corporation issued 40,000 shares of its $2 par-value common stock for cash at $20 a share. Record the issuance of the stock on page 1 of a general journal. Omit the description.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-09 Record stock issued at a premium and stock with no par value. Level: Medium Topic: Recording Capital Stock Transactions
20-60
Chapter 20 - Corporations: Formation and Capital Stock Transactions
76. The Lompoc Corporation is authorized to issue 500,000 shares of $4 par-value common stock and 100,000 shares of 6 percent, $100 par-value preferred stock. Record the following transactions on page 1 of a general journal. Omit descriptions.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-09 Record stock issued at a premium and stock with no par value. Level: Medium Topic: Recording Capital Stock Transactions
20-61
Chapter 20 - Corporations: Formation and Capital Stock Transactions
77. Turque Corporation issued 4,000 shares of its no-par-value common stock (stated value, $20) for cash at $22 a share. Record the issuance of the stock on page 1 of a general journal. Omit the description.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-09 Record stock issued at a premium and stock with no par value. Level: Medium Topic: Recording Capital Stock Transactions
20-62
Chapter 20 - Corporations: Formation and Capital Stock Transactions
78. Contreras Corporation issued 10,000 shares of its no-par-value common stock (stated value, $3) for cash at $30 a share. Record the issuance of the stock on page 1 of a general journal. Omit the description.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-09 Record stock issued at a premium and stock with no par value. Level: Medium Topic: Recording Capital Stock Transactions
20-63
Chapter 20 - Corporations: Formation and Capital Stock Transactions
79. On July 1, 2013, Abbott Corporation received a subscription from Brad Jones for 1,200 shares of its $1 par-value common stock at a price of $20 a share. Jones made a payment of $10 per share on the stock at the time of the subscription. Record the receipt of the subscription and the cash payment on page 1 of a general journal. Then, using the same page of the general journal, record the payment of the balance of Jones' subscription and issuance of the stock on August 1, 2013. Omit the descriptions.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Bloom's: Create Learning Objective: 20-10 Record transactions for stock subscriptions. Level: Medium Topic: Recording Capital Stock Transactions
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
80. The Mayfair Corporation was organized on August 1, 2013. The firm is authorized to issue 80,000 shares of no-par-value common stock with a stated value of $20 per share and 20,000 shares of $50 par-value, 12 percent preferred stock. Record the selected transactions on page 1 of a general journal. Omit descriptions.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-06 Record the issuance of capital stock at par value. Learning Objective: 20-09 Record stock issued at a premium and stock with no par value. Learning Objective: 20-10 Record transactions for stock subscriptions. Level: Medium Topic: Recording Capital Stock Transactions
81. The Lilac Corporation was organized on January 1, 2013. The firm is authorized to issue 160,000 shares of no-par-value common stock with a stated value of $40 per share and 40,000 shares of $100 par-value, 12 percent preferred stock. Record the selected transactions on page 1 of a general journal. Omit descriptions.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 20-06 Record the issuance of capital stock at par value. Learning Objective: 20-09 Record stock issued at a premium and stock with no par value. Learning Objective: 20-10 Record transactions for stock subscriptions. Level: Medium Topic: Recording Capital Stock Transactions
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
Matching Questions
82. Match the accounting terms with the description by entering the proper number.
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Chapter 20 - Corporations: Formation and Capital Stock Transactions
1. A person who owns shares of stock in a corporation; also called a stockholder 2. The corporate equivalent of owners' equity; also called shareholders' equity 3. Stock that is not assigned a par value in the corporate charter 4. Stock that conveys to its owners the stated preference dividend for the current year but no rights to dividends for years in which none were declared 5. The form by which capital stock is issued; the certificate indicates the name of the corporation, the name of the stockholder to whom the certificate was issued, the class of stock, and the number of shares 6. The guidelines for conducting a corporation's business affairs 7. Value of assets to be applied to preferred stock, usually par value or an amount in excess of par value, if the corporation is liquidated 8. A person or institution that handles all stock transfers and transfer records for a corporation 9. A basic or stated dividend rate for preferred stock that must be paid before dividends can be paid on common stock 10. Stock that gives the issuing corporation the right to repurchase the preferred shares from the stockholders at a specific price 11. A record of stock transfers used for posting to the stockholders' ledger 12. An amount assigned by the corporate charter to each share of stock for accounting purposes 13. Stock that conveys to its owners the right to receive the preference dividend for the current year and any prior years in which the preference dividend was not paid before common stockholders receive any dividends 14. A subsidiary ledger that contains an account receivable for each stock subscriber 15. Stock that conveys the right not only to the preference dividend amount but also to a share of other dividends paid 16. A partnership that provides limited liability for all partners 17. The costs associated with establishing a corporation
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Subscribers' ledger 14 Convertible preferred stock 18 Preference dividend 9 Nonparticipating preferred stock 22
Transfer agent 8 Organization costs 17
Corporate charter 21 Par value 12 Participating preferred stock 15
Subscription book 31 Preemptive right 20 Cumulative preferred stock 13
Dividends 28 Limited liability company (LLC) 33
Bylaws 6 Common stock 25 Authorized capital stock 27
Chapter 20 - Corporations: Formation and Capital Stock Transactions
18. Preferred stock that conveys the right to convert that stock to common stock after a specified date or during a period of time 19. A subsidiary ledger that contains a record of each stockholder's purchases, transfers, and current balance of shares owned; also called stockholders' ledger 20. A shareholder's right to purchase a proportionate amount of any new stock issued at a later date 21. A document issued by a state government that establishes a corporation 22. Stock that conveys to its owners the right to only the preference dividend amount specified on the stock certificate 23. A book in which accurate and complete records of all meetings of stockholders and directors are kept 24. The price per share at which stock is bought and sold 25. The general class of stock issued when no other class of stock is authorized; each share carries the same rights and privileges as every other share. Even if preferred stock is issued, common stock will also be issued 26. A person or institution in charge of the issuance and transfer of a corporation's stock 27. The number of shares authorized for issue by the corporate charter 28. Distributions of the profits of a corporation to its shareholders 29. The value that can be assigned to no-par-value stock by a board of directors for accounting purposes 30. An entity formed as a corporation that meets the requirements of Subchapter S of the Internal Revenue Code to be treated essentially as a partnership, so that the corporation pays no income tax 31. A list of the stock subscriptions received 32. A class of stock that has special claims on the corporate profits or, in case of liquidation, on corporate assets 33. Provides limited liability to the owners, who can elect to have the profits taxed at the LLC level or on their individual tax returns 34. Another term for capital stock ledger
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Limited liability partnership (LLP) 16 Callable preferred stock 10 No-par-value stock 3 Preferred stock 32
Registrar 26 Shareholder 1 Stockholders' equity 2
Stock certificate 5 Stated value 29 Capital stock transfer journal 11 Liquidation value 7 Market value 24
Capital stock ledger 19 Stockholders' ledger 34
Capital stock ledger 23 Noncumulative preferred stock 4 Subchapter S corporation (S) 30
Chapter 20 - Corporations: Formation and Capital Stock Transactions
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 20-01 Explain the characteristics of a corporation. Learning Objective: 20-02 Describe special "hybrid" organizations that have some characteristics of partnerships and some characteristics of corporations. Learning Objective: 20-03 Describe the different types of stock. Learning Objective: 20-04 Compute the number of shares of common stock to be issued on the conversion of convertible preferred stock. Learning Objective: 20-05 Compute dividends payable on stock. Learning Objective: 20-06 Record the issuance of capital stock at par value. Learning Objective: 20-07 Prepare a balance sheet for a corporation. Learning Objective: 20-08 Record organization costs. Learning Objective: 20-09 Record stock issued at a premium and stock with no par value. Learning Objective: 20-10 Record transactions for stock subscriptions. Learning Objective: 20-11 Describe the capital stock records for a corporation. Learning Objective: 20-12 Define the accounting terms new to this chapter. Level: Medium Topic: Forming a Corporation Topic: Recording Capital Stock Transactions Topic: Types of Capital Stock
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Chapter 21 - Corporate Earnings and Capital Transactions
Chapter 21 Corporate Earnings and Capital Transactions True / False Questions
1. A corporation may report net income for federal income tax purposes at an amount different from the amount reported for financial accounting purposes. True False
2. Deferred income taxes arise because the taxable income of a corporation can differ from the net income reported on its financial statements. True False
3. The last closing entry for a corporation transfers the net income after income taxes from the Income Summary account to Retained Earnings. True False
4. The entry to record the payment of a cash dividend includes a debit to Retained Earnings and a credit to Cash. True False
5. The entry to record the distribution of a stock dividend includes a credit to Common Stock Dividend Distribution. True False
6. Both cash dividends and stock dividends decrease the total stockholders' equity. True False
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Chapter 21 - Corporate Earnings and Capital Transactions
7. Declarations of cash dividends and stock dividends are debited to the Retained Earnings account. True False
8. The Dividends Payable accounts appear on the balance sheet as a current liability. True False
9. A 3-for-2 stock split will triple the reported dollar amount of stockholders' equity. True False
10. The entry to record the declaration of a stock split includes a debit to Retained Earnings. True False
11. Retained earnings do not represent a cash fund. True False
12. An appropriation of retained earnings reduces the amount of retained earnings available for dividend declarations. True False
13. Property that is received as a gift should be recorded in the corporation's records at the asset's fair market value. True False
14. When treasury stock is purchased, the Treasury Stock account is debited for the entire amount paid for the stock. True False
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Chapter 21 - Corporate Earnings and Capital Transactions
15. When a corporation purchases its own stock and intends to reissue that stock at a later date, the cost of the shares is shown in the Assets section of the balance sheet until the stock is reissued. True False
Fill in the Blank Questions
16. The effect of an event or transaction that is infrequent in occurrence and highly unusual in nature is shown as a(n) ____________________ item on the income statement. ________________________________________
17. To be entitled to receive a cash dividend, an investor must be listed as an owner of the stock on the ____________________ date. ________________________________________
18. The Dividends Payable accounts appear on the balance sheet as ____________________ liabilities. ________________________________________
19. When a previously declared stock dividend is distributed, the accountant makes an entry debiting Common Stock Dividend Distributable and crediting ___________________. ________________________________________
20. Although the balance of the Retained Earnings account is decreased, a(n) ____________________ dividend will not result in a decrease in total stockholders' equity. ________________________________________
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Chapter 21 - Corporate Earnings and Capital Transactions
21. A stock ____________________ increases the number of shares of stock outstanding and decreases the par value, or stated value, per share proportionally. ________________________________________
22. The ____________________ value of each share of stock is the total equity applicable to the class of stock divided by the number of shares outstanding. ________________________________________
23. On the date of declaration of a stock split, a(n) ____________________ notation is recorded in the general journal. ________________________________________
24. The effect of issuing a stock dividend is to convert a portion of the corporation's ____________________ to permanent capital. ________________________________________
25. Accumulated profits kept in the business and not distributed as dividends to stockholders are called ___________________. ________________________________________
26. If a corporation receives a gift of land valued at $10,000 from a city, the accountant will record a debit to Land and a credit to ___________________. ________________________________________
27. The Retained Earnings Appropriated—Treasury Stock account is shown in the ____________________ section of the balance sheet. ________________________________________
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Chapter 21 - Corporate Earnings and Capital Transactions
28. When a corporation reacquires stock that it previously issued and intends to reissue at a later date, the ____________________ account is debited. ________________________________________
29. A corporation's own capital stock that has been reacquired is called ____________________ stock. ________________________________________
30. The cost of treasury stock is deducted from the sum of all items in the ____________________ section of the balance sheet. ________________________________________
Multiple Choice Questions
31. Which of the following statements is not correct? A. Corporations must estimate and prepay their income taxes through quarterly tax deposits. B. At the end of the year, when the worksheet is prepared, the Income Tax Expense account is adjusted only if the corporation owes additional taxes. C. Income Tax Expense may be shown as an operating expense on a corporation's income statement. D. On a corporate income statement, the tax effects of each extraordinary item is offset against each gain or loss to show the effect ‘net of taxes.'
32. When the amount of future taxes that will be paid as a result of the MACRS depreciation deduction taken in this and prior years, an adjustment for the future taxes is made with a debit to A. Tax Expense and a credit to Deferred Income Tax Liability. B. Deferred Income Tax Liability and a credit to Tax Expense. C. Tax Expense and a credit to Deferred Income Tax Asset. D. Deferred Income Tax Asset and a credit to Tax Expense.
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Chapter 21 - Corporate Earnings and Capital Transactions
33. When the cumulative taxable income is higher than that reported on the financial statements, this gives rise to A. a deferred income tax liability. B. a deferred income tax asset. C. Either of the above D. Neither of the above.
34. If the corporation's income tax computed at the end of the year is less than the total of quarterly deposits, the necessary adjustment will result in a A. debit to Income Tax Expense. B. credit to Income Tax Payable. C. debit to Income Tax Refund Receivable. D. credit to Income Tax Refund Receivable.
35. The worksheet for a corporation and a sole proprietorship are almost identical. The major difference is the A. adjustment for accrued revenues. B. adjustment for accrued expenses. C. income tax adjustment. D. adjustment for depreciation.
36. Which of the following statements regarding the income statements of corporations is not correct? A. Some corporations include cost of goods sold with the operating expenses. B. Some corporations show income tax expense as an operating expense rather than as a deduction from net income before income tax. C. If a gain or loss results from a transaction that is highly unusual, is clearly unrelated to routine operations, and is not expected to occur again in the near future, the gain or loss is shown as an operating expense. D. Corporations can use a variety of formats for the income statement.
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Chapter 21 - Corporate Earnings and Capital Transactions
37. Which of the following statements is not correct? A. Retained earnings represents a cash fund. B. A corporation can have a large cash balance but no retained earnings. C. A corporation can have a balance in the Retained Earnings account but no cash. D. Retained earnings represent the undistributed profits and losses of the corporation.
38. The record date is the date A. on which the board of directors declares the dividend. B. used to determine who will receive the dividend. C. on which the dividend is paid. D. on which the dividend transaction is recorded in the general journal.
39. The entry to record the declaration of a cash dividend consists of a debit to A. Dividend Expense and a credit to Cash. B. Retained Earnings and a credit to Common Stock Dividend Distributable. C. Dividends Payable and a credit to Retained Earnings. D. Retained Earnings and a credit to Dividends Payable.
40. A liability for the payment of cash dividends is recorded A. on the date the board of directors publicly declares its intention to pay the dividends. B. only when cumulative preferred dividends are passed over (not paid) and are in arrears. C. at the end of any year during which common stock dividends were not paid. D. at the end of every year that the corporation makes a profit.
41. A declaration and distribution of a 20 percent stock dividend on common stock will A. not change the total stockholders' equity. B. increase the assets of the corporation. C. result in an increase in the book value of each share of common stock outstanding. D. increase the liabilities of the corporation.
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Chapter 21 - Corporate Earnings and Capital Transactions
42. Which of the following statements is not correct? A. Book value for each share of stock is the total equity applicable to the class of stock dividend by the number of shares issued. B. The total book value of a class of stock is increased after a stock dividend. C. The total book value of a class of stock is decreased after a stock dividend. D. All of the above statements are correct. In theory, a stock dividend should result in a proportionate reduction in each share's market value.
43. A corporation reported a net income of $90,000 for its fiscal year and declared and paid cash dividends of $60,000. A stock dividend recorded at $30,000 was also distributed during the year. If the beginning balance of the Retained Earnings account was $140,000, the ending balance is A. $230,000. B. $170,000. C. $140,000. D. $130,000.
44. A corporation reported a net income of $120,000 for its fiscal year and declared and paid cash dividends of $50,000. A stock dividend recorded at $80,000 was also distributed during the year. If the beginning balance of the Retained Earnings account was $200,000, the ending balance is A. $170,000. B. $190,000. C. $200,000. D. $270,000.
45. A corporation reported a net income of $120,000 for its fiscal year and declared and paid cash dividends of $60,000. A stock dividend recorded at $40,000 was also distributed during the year. If the ending balance of the Retained Earnings account was $200,000, the beginning balance is A. $160,000. B. $180,000. C. $200,000. D. $220,000.
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Chapter 21 - Corporate Earnings and Capital Transactions
46. Which of the following statements is not correct? A. The entry to record the appropriation of retained earnings for warehouse construction includes a debit to Retained Earnings. B. Appropriated retained earnings are listed separately on the balance sheet. C. When retained earnings are appropriated, cash is set aside for a specific purpose. D. Dividends cannot be declared from appropriated retained earnings.
47. Which of the following statements is correct? A. The Common Stock Dividends Distributable account is shown as a current liability on the balance sheet. B. When a stock dividend is distributed, no assets leave or enter the corporation. C. When a stock dividend is declared, the total amount debited to Retained Earnings is the par value, or stated value, of the shares to be issued. D. When a stock dividend is declared, the total amount of the dividend is debited to the Common Stock account.
48. An appropriation of retained earnings represents A. cash set aside for some designated purpose. B. a portion of retained earnings that is currently unavailable for dividends. C. a current liability of the corporation. D. a current asset of the corporation.
49. Total stockholders' equity would be decreased by A. a stock split. B. an appropriation of retained earnings. C. a cash dividend. D. a stock dividend.
50. Which of the following would not change the amount of total retained earnings for the year? A. The dividends on common stock B. The net income after taxes for the year C. An appropriation for building expansion D. The transfer of retained earnings appropriated for treasury stock
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Chapter 21 - Corporate Earnings and Capital Transactions
51. A corporation reacquired 400 shares of its $100 par-value common stock for $105 a share. The entry to record this transaction includes a A. Debit to Treasury Stock—Common for $40,000. B. Debit to Treasury Stock—Common for $42,000. C. Credit to Paid-in Capital for Treasury Stock Transactions—Common for $40,000. D. Credit to Treasury Stock—Common for $42,000.
52. The Treasury Stock account is shown on the balance sheet as A. an asset. B. an addition to the Common Stock and Preferred Stock accounts in the Stockholders' Equity section. C. a deduction from the Retained Earnings in the Stockholders' Equity section. D. a deduction from the sum of all other items in the Stockholders' Equity section.
53. When a corporation reacquires its own shares of stock, the Treasury Stock account is usually debited for A. par value of the shares reacquired. B. the price paid to reacquire the shares. C. the original issue price of the shares. D. the current market value of the shares.
54. Which of the following would be found on a corporation's income statement? A. Retained Earnings B. Income Tax Expense C. Organization Costs D. Dividends Payable
55. Treasury stock is A. stock previously paid for in full by a stockholder, then repurchased by the issuing corporation. B. donated by stockholders. C. always preferred stock. D. categorized under Paid-in Capital on the balance sheet and added to preferred and common stock.
21-10
Chapter 21 - Corporate Earnings and Capital Transactions
56. The total of the owners' claims to the assets of a corporation is represented by the A. balance of the Common Stock account. B. total retained earnings. C. total stockholders' equity. D. total assets of the corporation.
57. The income statement of a corporation and a sole proprietorship are similar with the exception of A. retained earnings. B. revenues reported. C. income taxes. D. total expenses of the corporation.
Short Answer Questions
58. After all revenue and expense accounts, other than Income Tax Expense, have been extended to the Income Statement section of the worksheet of Tyler Corporation, the net income is determined to be $50,000. Using the following corporate income tax rates, compute the corporation's federal income taxes payable. (Assume that the firm's taxable income is the same as its income for financial accounting purposes.)
21-11
Chapter 21 - Corporate Earnings and Capital Transactions
59. After all revenue and expense accounts, other than Income Tax Expense, have been extended to the Income Statement section of the worksheet of Carlton Corporation, the net income is determined to be $75,000. Using the following corporate income tax rates, compute the corporation's federal income taxes payable. (Assume that the firm's taxable income is the same as its income for financial accounting purposes.)
60. After all revenue and expense accounts, other than Income Tax Expense, have been extended to the Income Statement section of the worksheet of Genexo Corporation, the net income is determined to be $200,000. Using the following corporate income tax rates, compute the corporation's federal income taxes payable. (Assume that the firm's taxable income is the same as its income for financial accounting purposes.)
21-12
Chapter 21 - Corporate Earnings and Capital Transactions
61. After all revenue and expense accounts, other than Income Tax Expense, have been extended to the Income Statement section of the worksheet of Folk Enterprises, Inc., the net income is determined to be $300,000. Using the following corporate income tax rates, compute the corporation's federal income taxes payable. (Assume that the firm's taxable income is the same as its income for financial accounting purposes.)
62. A corporation has paid estimated income taxes of $89,800 during the year 2013. At the end of the year, the corporation's tax bill is computed to be $83,000. Record the entry to adjust the Income Tax Expense account on page 6 of a general journal. Omit the description.
63. A corporation has paid estimated income taxes of $57,500 during the year 2013. At the end of the year, the corporation's tax bill is computed to be $52,100. Record the entry to adjust the Income Tax Expense account on page 6 of a general journal. Omit the description.
21-13
Chapter 21 - Corporate Earnings and Capital Transactions
64. A corporation has paid estimated income taxes of $9,000 during the year 2013. At the end of the year, the corporation's tax bill is computed to be $10,000. Record the entry to adjust the Income Tax Expense account on page 6 of a general journal. Omit the description.
65. A corporation has paid estimated income taxes of $52,100 during the year 2013. At the end of the year, the corporation's tax bill is computed to be $57,500. Record the entry to adjust the Income Tax Expense account on page 6 of a general journal. Omit the description.
66. A corporation has paid estimated income taxes of $80,000 during the year 2013. At the end of the year, the corporation's tax bill is computed to be $100,000. Record the entry to adjust the Income Tax Expense account on page 6 of a general journal. Omit the description.
21-14
Chapter 21 - Corporate Earnings and Capital Transactions
67. On August 10, 2013 a corporation received a donation of land for a future plant site. The land has a fair market value of $800,000. Record the entry to reflect the receipt of this asset as a gift on page 3 of a general journal. Omit the description.
68. A corporation reported a net income of $200,000 for its fiscal year and declared and paid cash dividends of $80,000. A stock dividend recorded at $40,000 was also distributed during the year. If the beginning balance of the Retained Earnings account was $60,000, calculate the ending balance in the Retained Earnings account.
69. A corporation reported a net income of $200,000 for its fiscal year and declared and paid cash dividends of $90,000. A stock dividend recorded at $50,000 was also distributed during the year. If the ending balance of the Retained Earnings account was $300,000, calculate the beginning balance in the Retained Earnings account.
21-15
Chapter 21 - Corporate Earnings and Capital Transactions
70. In each of the following situations, what is the amount of profit or loss? In each situation, what account will be debited and credited, and for what amount, in the journal entry to close the Income Summary account? 1. The total of the debit column in the Income Statement section of the worksheet was $84,000 and the total of the credit column in that section was $74,000. 2. The total in the debit column of the Income Statement section was $600,000 and the total of the credit column was $700,000. 3. The total of the debit column in the Balance Sheet section was $90,000 and the total of the credit column in that section was $82,000.
71. In each of the following situations, what is the amount of profit or loss? In each situation, what account will be debited and credited, and for what amount, in the journal entry to close the Income Summary account? 1. The total of the debit column in the Income Statement section of the worksheet was $94,000 and the total of the credit column in that section was $104,000. 2. The total in the debit column of the Income Statement section was $200,000 and the total of the credit column was $100,000. 3. The total of the debit column in the Balance Sheet section was $53,000 and the total of the credit column in that section was $55,000.
21-16
Chapter 21 - Corporate Earnings and Capital Transactions
72. Information from the Income Statement columns of Leland Corporation's worksheet on December 31, 2013, is shown below.
1. What is the amount of net income before income tax? 2. What is the amount of income tax on the net income? Use the tax rates set forth below. 3. What adjustment is recorded for Income Tax Expense? The corporation paid $8,400 through quarterly deposits. 4. What is the amount of net income after income tax?
21-17
Chapter 21 - Corporate Earnings and Capital Transactions
73. Information from the Income Statement columns of Lincoln Corporation's worksheet on December 31, 2013, is shown below.
1. What is the amount of net income before income tax? 2. What is the amount of income tax on the net income? Use the tax rates set forth below. 3. What adjustment is recorded for Income Tax Expense? The corporation paid $21,000 through quarterly deposits. 4. What is the amount of net income after income tax?
21-18
Chapter 21 - Corporate Earnings and Capital Transactions
74. Information from the Income Statement columns of King Corporation's worksheet on December 31, 2013, is shown below.
1. What is the amount of net income before income tax? 2. What is the amount of income tax on the net income? Use the tax rates set forth below. 3. What adjustment is recorded for Income Tax Expense? The corporation paid $5,000 through quarterly deposits. 4. What is the amount of net income after income tax?
21-19
Chapter 21 - Corporate Earnings and Capital Transactions
75. Information from the Income Statement columns of King Corporation's worksheet on December 31, 2013, is shown below.
1. What is the amount of net income before income tax? 2. What is the amount of income tax on the net income? Use the tax rates set forth below. 3. What adjustment is recorded for Income Tax Expense? The corporation paid $5,000 through quarterly deposits. 4. What is the amount of net income after income tax?
21-20
Chapter 21 - Corporate Earnings and Capital Transactions
76. Selected transactions of the Hayward Corporation during 2013 and 2014 are given below. Record the transactions on page 6 of a general journal. Omit descriptions.
21-21
Chapter 21 - Corporate Earnings and Capital Transactions
77. Selected transactions of the Streng Corporation during 2013 and 2014 are given below. Record the transactions on page 6 of a general journal. Omit descriptions.
21-22
Chapter 21 - Corporate Earnings and Capital Transactions
78. The Dever Corporation is authorized to issue 3,000 shares of 8 percent, $50 par-value preferred stock and 10,000 shares of no-par-value common stock with a stated value of $20 per share. On December 31, 2013, 1,000 shares of preferred stock and 4,000 shares of common stock are issued and outstanding. The corporation's transactions affecting stockholders' equity during 2014 are given below. Record the transactions on page 8 of a general journal. Omit descriptions.
21-23
Chapter 21 - Corporate Earnings and Capital Transactions
79. The Santa Fe Corporation is authorized to issue 6,000 shares of 4 percent, $100 par-value preferred stock and 20,000 shares of no-par-value common stock with a stated value of $40 per share. On December 31, 2013, 2,000 shares of preferred stock and 8,000 shares of common stock are issued and outstanding. The corporation's transactions affecting stockholders' equity during 2014 are given below. Record the transactions on page 15 of a general journal. Omit descriptions.
21-24
Chapter 21 - Corporate Earnings and Capital Transactions
80. The Intrepid Corporation is authorized to issue 10,000 shares of 6 percent, $100 par-value preferred stock and 50,000 shares of $2 par-value common stock On December 31, 2013, 1,000 shares of preferred stock and 20,000 shares of common stock are issued and outstanding. The corporation's transactions affecting stockholders' equity during 2014 are given below. Record the transactions on page 8 of a general journal. Omit descriptions.
81. The Topeka Corporation has 40,000 shares of $3 par value common stock outstanding. On July 1, the corporation declared a stock dividend payable July 31, 2014, to common stockholders of record on July 20, 2014, at the rate of one new share of common stock for each ten shares held. The estimated market value of the common stock is $36 per share. Record the transactions on page 15 of a general journal. Omit descriptions.
21-25
Chapter 21 - Corporate Earnings and Capital Transactions
82. The following information was taken from the accounting records of the Gemini Corporation on December 31, 2013. Using this information, prepare the Stockholders' Equity section of the corporation's balance sheet.
83. The following information was taken from the accounting records of the Goodens Corporation on December 31, 2013. Using this information, prepare the Stockholders' Equity section of the corporation's balance sheet.
21-26
Chapter 21 - Corporate Earnings and Capital Transactions
84. The following information was taken from the accounting records of the Arens Corporation on December 31, 2013. Using this information, prepare the Stockholders' Equity section of the corporation's balance sheet.
21-27
Chapter 21 - Corporate Earnings and Capital Transactions
Matching Questions
85. Match the accounting terms with the description by entering the proper number. 1. Equity account used to record par, or stated, value of shares to be issued as the result of the Statement of declaration of a stock dividend stockholders' equity. ____ 2. A formal declaration of an intention to restrict dividends Donated capital. ____ 3. The amount of taxes that will be payable in the future as a result of the difference between taxable income and income for financial statement purposes in the current year and in past years Paid-in capital. ____ 4. Capital acquired from capital stock transactions Stock dividend. ____ 5. The date on which the specific stockholders to Appropriation of receive a dividend are determined retained earnings. ____ 6. A financial statement that provides an analysis Common Stock reconciling the beginning and ending balance of Dividend Distributable each of the stockholders' equity accounts account. ____ 7. The total equity applicable to a class of stock divided by the number of shares outstanding Retained earnings. ____ 8. When a corporation issues two or more shares of new stock to replace each share outstanding without making any changes in the capital accounts Stock split. ____ 9. The cumulative profits and losses of the Extraordinary, corporation not distributed as dividends nonrecurring items. ____ 10. Transactions that are highly unusual, clearly unrelated to routine operations, and that do not frequently occur Payment date. ____ 11. Capital resulting from the receipt of gifts by a Stockholders of corporation record. ____ 12. Distribution of the corporation's own stock on a pro rata basis that results in conversion of a portion of the firm's retained earnings to permanent capital Book value (stock). ____ 13. Stockholders in whose name shares are held on date of record and who will receive a declared dividend Declaration date. ____ 14. The date on which the board of directors declares a dividend Record date. ____ Statement of retained 15. The date that dividends are paid earnings. ____ 16. A financial statement that shows all changes that have occurred in retained earnings during the period Treasury stock. ____
21-28
Chapter 21 - Corporate Earnings and Capital Transactions
17. A corporation's own capital stock that has been issued and reacquired; the stock must have been previously paid in full and issued to a stockholder
21-29
Deferred income taxes. ____
Chapter 21 - Corporate Earnings and Capital Transactions
Chapter 21 Corporate Earnings and Capital Transactions Answer Key
True / False Questions
1. A corporation may report net income for federal income tax purposes at an amount different from the amount reported for financial accounting purposes. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Level: Easy Topic: Accounting for Corporate Earnings
2. Deferred income taxes arise because the taxable income of a corporation can differ from the net income reported on its financial statements. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Level: Easy Topic: Accounting for Corporate Earnings
21-30
Chapter 21 - Corporate Earnings and Capital Transactions
3. The last closing entry for a corporation transfers the net income after income taxes from the Income Summary account to Retained Earnings. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 21-03 Record corporate adjusting and closing entries. Level: Easy Topic: Accounting for Corporate Earnings
4. The entry to record the payment of a cash dividend includes a debit to Retained Earnings and a credit to Cash. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-05 Record the declaration and payment of cash dividends. Level: Easy Topic: Accounting for Retained Earnings
5. The entry to record the distribution of a stock dividend includes a credit to Common Stock Dividend Distribution. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Level: Easy Topic: Accounting for Retained Earnings
6. Both cash dividends and stock dividends decrease the total stockholders' equity. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 21-05 Record the declaration and payment of cash dividends. Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Level: Easy Topic: Accounting for Retained Earnings
21-31
Chapter 21 - Corporate Earnings and Capital Transactions
7. Declarations of cash dividends and stock dividends are debited to the Retained Earnings account. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 21-05 Record the declaration and payment of cash dividends. Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Level: Easy Topic: Accounting for Retained Earnings
8. The Dividends Payable accounts appear on the balance sheet as a current liability. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 21-05 Record the declaration and payment of cash dividends. Level: Easy Topic: Accounting for Retained Earnings
9. A 3-for-2 stock split will triple the reported dollar amount of stockholders' equity. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Level: Easy Topic: Accounting for Retained Earnings
10. The entry to record the declaration of a stock split includes a debit to Retained Earnings. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-07 Record stock splits. Level: Easy Topic: Accounting for Retained Earnings
21-32
Chapter 21 - Corporate Earnings and Capital Transactions
11. Retained earnings do not represent a cash fund. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 21-08 Record appropriations of retained earnings. Level: Easy Topic: Accounting for Retained Earnings
12. An appropriation of retained earnings reduces the amount of retained earnings available for dividend declarations. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-08 Record appropriations of retained earnings. Level: Easy Topic: Accounting for Retained Earnings
13. Property that is received as a gift should be recorded in the corporation's records at the asset's fair market value. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 21-09 Record a corporation's receipt of donated assets. Level: Easy Topic: Other Capital Transactions and Financial Statements
14. When treasury stock is purchased, the Treasury Stock account is debited for the entire amount paid for the stock. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-10 Record treasury stock transactions. Level: Easy Topic: Other Capital Transactions and Financial Statements
21-33
Chapter 21 - Corporate Earnings and Capital Transactions
15. When a corporation purchases its own stock and intends to reissue that stock at a later date, the cost of the shares is shown in the Assets section of the balance sheet until the stock is reissued. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-10 Record treasury stock transactions. Level: Easy Topic: Accounting for Retained Earnings
Fill in the Blank Questions
16. The effect of an event or transaction that is infrequent in occurrence and highly unusual in nature is shown as a(n) ____________________ item on the income statement. extraordinary
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-04 Prepare an income statement for a corporation. Level: Easy Topic: Accounting for Corporate Earnings
17. To be entitled to receive a cash dividend, an investor must be listed as an owner of the stock on the ____________________ date. record
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 21-05 Record the declaration and payment of cash dividends. Level: Easy Topic: Accounting for Retained Earnings
21-34
Chapter 21 - Corporate Earnings and Capital Transactions
18. The Dividends Payable accounts appear on the balance sheet as ____________________ liabilities. current
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 21-05 Record the declaration and payment of cash dividends. Level: Easy Topic: Accounting for Retained Earnings
19. When a previously declared stock dividend is distributed, the accountant makes an entry debiting Common Stock Dividend Distributable and crediting ___________________. Common Stock
AACSB: Reflective Thinking AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Level: Easy Topic: Accounting for Retained Earnings
20. Although the balance of the Retained Earnings account is decreased, a(n) ____________________ dividend will not result in a decrease in total stockholders' equity. stock
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Level: Easy Topic: Accounting for Retained Earnings
21. A stock ____________________ increases the number of shares of stock outstanding and decreases the par value, or stated value, per share proportionally. split
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-07 Record stock splits. Level: Easy Topic: Accounting for Retained Earnings
21-35
Chapter 21 - Corporate Earnings and Capital Transactions
22. The ____________________ value of each share of stock is the total equity applicable to the class of stock divided by the number of shares outstanding. book
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-07 Record stock splits. Level: Easy Topic: Accounting for Retained Earnings
23. On the date of declaration of a stock split, a(n) ____________________ notation is recorded in the general journal. memorandum
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-07 Record stock splits. Level: Easy Topic: Accounting for Retained Earnings
24. The effect of issuing a stock dividend is to convert a portion of the corporation's ____________________ to permanent capital. retained earnings
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-08 Record appropriations of retained earnings. Level: Easy Topic: Accounting for Retained Earnings
25. Accumulated profits kept in the business and not distributed as dividends to stockholders are called ___________________. retained earnings
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-08 Record appropriations of retained earnings. Level: Easy Topic: Accounting for Retained Earnings
21-36
Chapter 21 - Corporate Earnings and Capital Transactions
26. If a corporation receives a gift of land valued at $10,000 from a city, the accountant will record a debit to Land and a credit to ___________________. donated Capital
AACSB: Reflective Thinking AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-09 Record a corporation's receipt of donated assets. Level: Easy Topic: Other Capital Transactions and Financial Statements
27. The Retained Earnings Appropriated—Treasury Stock account is shown in the ____________________ section of the balance sheet. Stockholders' Equity
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-10 Record treasury stock transactions. Level: Easy Topic: Other Capital Transactions and Financial Statements
28. When a corporation reacquires stock that it previously issued and intends to reissue at a later date, the ____________________ account is debited. Treasury Stock
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-10 Record treasury stock transactions. Level: Easy Topic: Other Capital Transactions and Financial Statements
21-37
Chapter 21 - Corporate Earnings and Capital Transactions
29. A corporation's own capital stock that has been reacquired is called ____________________ stock. treasury
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-10 Record treasury stock transactions. Learning Objective: 21-12 Define the accounting terms new to this chapter. Level: Easy Topic: Other Capital Transactions and Financial Statements
30. The cost of treasury stock is deducted from the sum of all items in the ____________________ section of the balance sheet. Stockholders' Equity
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-10 Record treasury stock transactions. Level: Easy Topic: Other Capital Transactions and Financial Statements
Multiple Choice Questions
31. Which of the following statements is not correct? A. Corporations must estimate and prepay their income taxes through quarterly tax deposits. B. At the end of the year, when the worksheet is prepared, the Income Tax Expense account is adjusted only if the corporation owes additional taxes. C. Income Tax Expense may be shown as an operating expense on a corporation's income statement. D. On a corporate income statement, the tax effects of each extraordinary item is offset against each gain or loss to show the effect ‘net of taxes.'
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 21-04 Prepare an income statement for a corporation. Level: Easy Topic: Accounting for Retained Earnings
21-38
Chapter 21 - Corporate Earnings and Capital Transactions
32. When the amount of future taxes that will be paid as a result of the MACRS depreciation deduction taken in this and prior years, an adjustment for the future taxes is made with a debit to A. Tax Expense and a credit to Deferred Income Tax Liability. B. Deferred Income Tax Liability and a credit to Tax Expense. C. Tax Expense and a credit to Deferred Income Tax Asset. D. Deferred Income Tax Asset and a credit to Tax Expense.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Level: Easy Topic: Accounting for Corporate Earnings
33. When the cumulative taxable income is higher than that reported on the financial statements, this gives rise to A. a deferred income tax liability. B. a deferred income tax asset. C. Either of the above D. Neither of the above.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Level: Easy Topic: Accounting for Corporate Earnings
34. If the corporation's income tax computed at the end of the year is less than the total of quarterly deposits, the necessary adjustment will result in a A. debit to Income Tax Expense. B. credit to Income Tax Payable. C. debit to Income Tax Refund Receivable. D. credit to Income Tax Refund Receivable.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Level: Easy Topic: Accounting for Corporate Earnings
21-39
Chapter 21 - Corporate Earnings and Capital Transactions
35. The worksheet for a corporation and a sole proprietorship are almost identical. The major difference is the A. adjustment for accrued revenues. B. adjustment for accrued expenses. C. income tax adjustment. D. adjustment for depreciation.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-02 Complete a worksheet for a corporation. Level: Easy Topic: Accounting for Corporate Earnings
36. Which of the following statements regarding the income statements of corporations is not correct? A. Some corporations include cost of goods sold with the operating expenses. B. Some corporations show income tax expense as an operating expense rather than as a deduction from net income before income tax. C. If a gain or loss results from a transaction that is highly unusual, is clearly unrelated to routine operations, and is not expected to occur again in the near future, the gain or loss is shown as an operating expense. D. Corporations can use a variety of formats for the income statement.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 21-04 Prepare an income statement for a corporation. Level: Easy Topic: Accounting for Corporate Earnings
37. Which of the following statements is not correct? A. Retained earnings represents a cash fund. B. A corporation can have a large cash balance but no retained earnings. C. A corporation can have a balance in the Retained Earnings account but no cash. D. Retained earnings represent the undistributed profits and losses of the corporation.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 21-05 Record the declaration and payment of cash dividends. Level: Easy Topic: Accounting for Retained Earnings
21-40
Chapter 21 - Corporate Earnings and Capital Transactions
38. The record date is the date A. on which the board of directors declares the dividend. B. used to determine who will receive the dividend. C. on which the dividend is paid. D. on which the dividend transaction is recorded in the general journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-05 Record the declaration and payment of cash dividends. Level: Easy Topic: Accounting for Retained Earnings
39. The entry to record the declaration of a cash dividend consists of a debit to A. Dividend Expense and a credit to Cash. B. Retained Earnings and a credit to Common Stock Dividend Distributable. C. Dividends Payable and a credit to Retained Earnings. D. Retained Earnings and a credit to Dividends Payable.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-05 Record the declaration and payment of cash dividends. Level: Easy Topic: Accounting for Retained Earnings
40. A liability for the payment of cash dividends is recorded A. on the date the board of directors publicly declares its intention to pay the dividends. B. only when cumulative preferred dividends are passed over (not paid) and are in arrears. C. at the end of any year during which common stock dividends were not paid. D. at the end of every year that the corporation makes a profit.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-05 Record the declaration and payment of cash dividends. Level: Easy Topic: Accounting for Retained Earnings
21-41
Chapter 21 - Corporate Earnings and Capital Transactions
41. A declaration and distribution of a 20 percent stock dividend on common stock will A. not change the total stockholders' equity. B. increase the assets of the corporation. C. result in an increase in the book value of each share of common stock outstanding. D. increase the liabilities of the corporation.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Level: Easy Topic: Accounting for Retained Earnings
42. Which of the following statements is not correct? A. Book value for each share of stock is the total equity applicable to the class of stock dividend by the number of shares issued. B. The total book value of a class of stock is increased after a stock dividend. C. The total book value of a class of stock is decreased after a stock dividend. D. All of the above statements are correct. In theory, a stock dividend should result in a proportionate reduction in each share's market value.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Level: Easy Topic: Accounting for Retained Earnings
21-42
Chapter 21 - Corporate Earnings and Capital Transactions
43. A corporation reported a net income of $90,000 for its fiscal year and declared and paid cash dividends of $60,000. A stock dividend recorded at $30,000 was also distributed during the year. If the beginning balance of the Retained Earnings account was $140,000, the ending balance is A. $230,000. B. $170,000. C. $140,000. D. $130,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 21-05 Record the declaration and payment of cash dividends. Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Level: Medium Topic: Accounting for Retained Earnings
44. A corporation reported a net income of $120,000 for its fiscal year and declared and paid cash dividends of $50,000. A stock dividend recorded at $80,000 was also distributed during the year. If the beginning balance of the Retained Earnings account was $200,000, the ending balance is A. $170,000. B. $190,000. C. $200,000. D. $270,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 21-05 Record the declaration and payment of cash dividends. Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Level: Medium Topic: Accounting for Retained Earnings
21-43
Chapter 21 - Corporate Earnings and Capital Transactions
45. A corporation reported a net income of $120,000 for its fiscal year and declared and paid cash dividends of $60,000. A stock dividend recorded at $40,000 was also distributed during the year. If the ending balance of the Retained Earnings account was $200,000, the beginning balance is A. $160,000. B. $180,000. C. $200,000. D. $220,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 21-05 Record the declaration and payment of cash dividends. Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Level: Medium Topic: Accounting for Retained Earnings
46. Which of the following statements is not correct? A. The entry to record the appropriation of retained earnings for warehouse construction includes a debit to Retained Earnings. B. Appropriated retained earnings are listed separately on the balance sheet. C. When retained earnings are appropriated, cash is set aside for a specific purpose. D. Dividends cannot be declared from appropriated retained earnings.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 21-08 Record appropriations of retained earnings. Level: Easy Topic: Accounting for Retained Earnings
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Chapter 21 - Corporate Earnings and Capital Transactions
47. Which of the following statements is correct? A. The Common Stock Dividends Distributable account is shown as a current liability on the balance sheet. B. When a stock dividend is distributed, no assets leave or enter the corporation. C. When a stock dividend is declared, the total amount debited to Retained Earnings is the par value, or stated value, of the shares to be issued. D. When a stock dividend is declared, the total amount of the dividend is debited to the Common Stock account.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Level: Easy Topic: Accounting for Retained Earnings
48. An appropriation of retained earnings represents A. cash set aside for some designated purpose. B. a portion of retained earnings that is currently unavailable for dividends. C. a current liability of the corporation. D. a current asset of the corporation.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-08 Record appropriations of retained earnings. Level: Easy Topic: Accounting for Retained Earnings
49. Total stockholders' equity would be decreased by A. a stock split. B. an appropriation of retained earnings. C. a cash dividend. D. a stock dividend.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-05 Record the declaration and payment of cash dividends. Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Learning Objective: 21-07 Record stock splits. Learning Objective: 21-08 Record appropriations of retained earnings. Level: Easy Topic: Accounting for Retained Earnings
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Chapter 21 - Corporate Earnings and Capital Transactions
50. Which of the following would not change the amount of total retained earnings for the year? A. The dividends on common stock B. The net income after taxes for the year C. An appropriation for building expansion D. The transfer of retained earnings appropriated for treasury stock
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Learning Objective: 21-05 Record the declaration and payment of cash dividends. Learning Objective: 21-08 Record appropriations of retained earnings. Level: Easy Topic: Accounting for Corporate Earnings Topic: Accounting for Retained Earnings
51. A corporation reacquired 400 shares of its $100 par-value common stock for $105 a share. The entry to record this transaction includes a A. Debit to Treasury Stock—Common for $40,000. B. Debit to Treasury Stock—Common for $42,000. C. Credit to Paid-in Capital for Treasury Stock Transactions—Common for $40,000. D. Credit to Treasury Stock—Common for $42,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 21-10 Record treasury stock transactions. Level: Medium Topic: Other Capital Transactions and Financial Statements
52. The Treasury Stock account is shown on the balance sheet as A. an asset. B. an addition to the Common Stock and Preferred Stock accounts in the Stockholders' Equity section. C. a deduction from the Retained Earnings in the Stockholders' Equity section. D. a deduction from the sum of all other items in the Stockholders' Equity section.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-10 Record treasury stock transactions. Level: Easy Topic: Other Capital Transactions and Financial Statements
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Chapter 21 - Corporate Earnings and Capital Transactions
53. When a corporation reacquires its own shares of stock, the Treasury Stock account is usually debited for A. par value of the shares reacquired. B. the price paid to reacquire the shares. C. the original issue price of the shares. D. the current market value of the shares.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-10 Record treasury stock transactions. Level: Easy Topic: Other Capital Transactions and Financial Statements
54. Which of the following would be found on a corporation's income statement? A. Retained Earnings B. Income Tax Expense C. Organization Costs D. Dividends Payable
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 21-11 Prepare financial statements for a corporation. Level: Easy Topic: Other Capital Transactions and Financial Statements
55. Treasury stock is A. stock previously paid for in full by a stockholder, then repurchased by the issuing corporation. B. donated by stockholders. C. always preferred stock. D. categorized under Paid-in Capital on the balance sheet and added to preferred and common stock.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-10 Record treasury stock transactions. Level: Easy Topic: Other Capital Transactions and Financial Statements
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Chapter 21 - Corporate Earnings and Capital Transactions
56. The total of the owners' claims to the assets of a corporation is represented by the A. balance of the Common Stock account. B. total retained earnings. C. total stockholders' equity. D. total assets of the corporation.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-11 Prepare financial statements for a corporation. Level: Easy Topic: Other Capital Transactions and Financial Statements
57. The income statement of a corporation and a sole proprietorship are similar with the exception of A. retained earnings. B. revenues reported. C. income taxes. D. total expenses of the corporation.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 21-04 Prepare an income statement for a corporation. Level: Easy Topic: Accounting for Corporate Earnings
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Chapter 21 - Corporate Earnings and Capital Transactions
Short Answer Questions
58. After all revenue and expense accounts, other than Income Tax Expense, have been extended to the Income Statement section of the worksheet of Tyler Corporation, the net income is determined to be $50,000. Using the following corporate income tax rates, compute the corporation's federal income taxes payable. (Assume that the firm's taxable income is the same as its income for financial accounting purposes.)
$7,500 Feedback: 7,500 = $50,000 x .15.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Level: Medium Topic: Accounting for Corporate Earnings
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Chapter 21 - Corporate Earnings and Capital Transactions
59. After all revenue and expense accounts, other than Income Tax Expense, have been extended to the Income Statement section of the worksheet of Carlton Corporation, the net income is determined to be $75,000. Using the following corporate income tax rates, compute the corporation's federal income taxes payable. (Assume that the firm's taxable income is the same as its income for financial accounting purposes.)
$13,750 Feedback: 13,750 = $50,000 x .15 + $25,000 x .25.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Level: Medium Topic: Accounting for Corporate Earnings
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Chapter 21 - Corporate Earnings and Capital Transactions
60. After all revenue and expense accounts, other than Income Tax Expense, have been extended to the Income Statement section of the worksheet of Genexo Corporation, the net income is determined to be $200,000. Using the following corporate income tax rates, compute the corporation's federal income taxes payable. (Assume that the firm's taxable income is the same as its income for financial accounting purposes.)
$61,250 Feedback: 61,250 = $50,000 x .15 + $25,000 x .25 + $25,000 x .34 + $100,000 x .39.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Level: Medium Topic: Accounting for Corporate Earnings
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Chapter 21 - Corporate Earnings and Capital Transactions
61. After all revenue and expense accounts, other than Income Tax Expense, have been extended to the Income Statement section of the worksheet of Folk Enterprises, Inc., the net income is determined to be $300,000. Using the following corporate income tax rates, compute the corporation's federal income taxes payable. (Assume that the firm's taxable income is the same as its income for financial accounting purposes.)
$100,250 Feedback: 100,250 = $50,000 x .15 + $25,000 x .25 + $25,000 x .34 + $200,000 x .39.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Level: Medium Topic: Accounting for Corporate Earnings
62. A corporation has paid estimated income taxes of $89,800 during the year 2013. At the end of the year, the corporation's tax bill is computed to be $83,000. Record the entry to adjust the Income Tax Expense account on page 6 of a general journal. Omit the description.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Level: Medium Topic: Accounting for Corporate Earnings
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Chapter 21 - Corporate Earnings and Capital Transactions
63. A corporation has paid estimated income taxes of $57,500 during the year 2013. At the end of the year, the corporation's tax bill is computed to be $52,100. Record the entry to adjust the Income Tax Expense account on page 6 of a general journal. Omit the description.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Level: Medium Topic: Accounting for Corporate Earnings
64. A corporation has paid estimated income taxes of $9,000 during the year 2013. At the end of the year, the corporation's tax bill is computed to be $10,000. Record the entry to adjust the Income Tax Expense account on page 6 of a general journal. Omit the description.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Level: Medium Topic: Accounting for Corporate Earnings
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Chapter 21 - Corporate Earnings and Capital Transactions
65. A corporation has paid estimated income taxes of $52,100 during the year 2013. At the end of the year, the corporation's tax bill is computed to be $57,500. Record the entry to adjust the Income Tax Expense account on page 6 of a general journal. Omit the description.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Level: Medium Topic: Accounting for Corporate Earnings
66. A corporation has paid estimated income taxes of $80,000 during the year 2013. At the end of the year, the corporation's tax bill is computed to be $100,000. Record the entry to adjust the Income Tax Expense account on page 6 of a general journal. Omit the description.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Level: Medium Topic: Accounting for Corporate Earnings
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Chapter 21 - Corporate Earnings and Capital Transactions
67. On August 10, 2013 a corporation received a donation of land for a future plant site. The land has a fair market value of $800,000. Record the entry to reflect the receipt of this asset as a gift on page 3 of a general journal. Omit the description.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-09 Record a corporation's receipt of donated assets. Level: Medium Topic: Accounting for Corporate Earnings
68. A corporation reported a net income of $200,000 for its fiscal year and declared and paid cash dividends of $80,000. A stock dividend recorded at $40,000 was also distributed during the year. If the beginning balance of the Retained Earnings account was $60,000, calculate the ending balance in the Retained Earnings account. $140,000 Feedback: $140,000 = 60,000 + 200,000 - 80,000 - 40,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 21-05 Record the declaration and payment of cash dividends. Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Level: Medium Topic: Accounting for Retained Earnings
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Chapter 21 - Corporate Earnings and Capital Transactions
69. A corporation reported a net income of $200,000 for its fiscal year and declared and paid cash dividends of $90,000. A stock dividend recorded at $50,000 was also distributed during the year. If the ending balance of the Retained Earnings account was $300,000, calculate the beginning balance in the Retained Earnings account. $240,000 Feedback: 300,000 = 240,000 + 200,000 - 90,000 - 50,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 21-05 Record the declaration and payment of cash dividends. Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Level: Medium Topic: Accounting for Retained Earnings
70. In each of the following situations, what is the amount of profit or loss? In each situation, what account will be debited and credited, and for what amount, in the journal entry to close the Income Summary account? 1. The total of the debit column in the Income Statement section of the worksheet was $84,000 and the total of the credit column in that section was $74,000. 2. The total in the debit column of the Income Statement section was $600,000 and the total of the credit column was $700,000. 3. The total of the debit column in the Balance Sheet section was $90,000 and the total of the credit column in that section was $82,000. 1. There was a loss of $10,000. Credit Income Summary for $10,000 and debit Retained Earnings for $10,000. 2. There was a profit after taxes of $100,000. Debit Income Summary for $100,000 and credit Retained Earnings for $100,000. 3. There was a profit of $8,000. Debit Income Summary for $8,000 and credit Retained Earnings for $8,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-09 Record a corporation's receipt of donated assets. Level: Medium Topic: Accounting for Corporate Earnings
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Chapter 21 - Corporate Earnings and Capital Transactions
71. In each of the following situations, what is the amount of profit or loss? In each situation, what account will be debited and credited, and for what amount, in the journal entry to close the Income Summary account? 1. The total of the debit column in the Income Statement section of the worksheet was $94,000 and the total of the credit column in that section was $104,000. 2. The total in the debit column of the Income Statement section was $200,000 and the total of the credit column was $100,000. 3. The total of the debit column in the Balance Sheet section was $53,000 and the total of the credit column in that section was $55,000. 1. There was a profit of $10,000. Credit Income Summary for $10,000 and debit Retained Earnings for $10,000. 2. There was a loss after taxes of $100,000. Debit Income Summary for $100,000 and credit Retained Earnings for $100,000. 3. There was a loss of $2,000. Debit Income Summary for $2,000 and credit Retained Earnings for $8,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-09 Record a corporation's receipt of donated assets. Level: Medium Topic: Accounting for Corporate Earnings
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Chapter 21 - Corporate Earnings and Capital Transactions
72. Information from the Income Statement columns of Leland Corporation's worksheet on December 31, 2013, is shown below.
1. What is the amount of net income before income tax? 2. What is the amount of income tax on the net income? Use the tax rates set forth below. 3. What adjustment is recorded for Income Tax Expense? The corporation paid $8,400 through quarterly deposits. 4. What is the amount of net income after income tax?
1. $54,700; 2. $8,675; 3. Debit Income Tax Expense, $275; credit Income Tax Payable, $275; 4. $46,025 Feedback:
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Chapter 21 - Corporate Earnings and Capital Transactions
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Learning Objective: 21-03 Record corporate adjusting and closing entries. Level: Medium Topic: Accounting for Corporate Earnings
73. Information from the Income Statement columns of Lincoln Corporation's worksheet on December 31, 2013, is shown below.
1. What is the amount of net income before income tax? 2. What is the amount of income tax on the net income? Use the tax rates set forth below. 3. What adjustment is recorded for Income Tax Expense? The corporation paid $21,000 through quarterly deposits. 4. What is the amount of net income after income tax?
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Chapter 21 - Corporate Earnings and Capital Transactions
1. $109,400; 2. $25,446; 3. Debit Income Tax Expense, $4,446; credit Income Tax Payable, $4,446; 4. $83,954 Feedback:
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Learning Objective: 21-03 Record corporate adjusting and closing entries. Level: Medium Topic: Accounting for Corporate Earnings
74. Information from the Income Statement columns of King Corporation's worksheet on December 31, 2013, is shown below.
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Chapter 21 - Corporate Earnings and Capital Transactions
1. What is the amount of net income before income tax? 2. What is the amount of income tax on the net income? Use the tax rates set forth below. 3. What adjustment is recorded for Income Tax Expense? The corporation paid $5,000 through quarterly deposits. 4. What is the amount of net income after income tax?
1. $27,350; 2. $4,102.50; 3. Debit Income Tax Refund Receivable $877.50, Credit Income Tax Expense, $987.50; 4. $23,247.50 Feedback:
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Learning Objective: 21-03 Record corporate adjusting and closing entries. Level: Medium Topic: Accounting for Corporate Earnings
21-61
Chapter 21 - Corporate Earnings and Capital Transactions
75. Information from the Income Statement columns of King Corporation's worksheet on December 31, 2013, is shown below.
1. What is the amount of net income before income tax? 2. What is the amount of income tax on the net income? Use the tax rates set forth below. 3. What adjustment is recorded for Income Tax Expense? The corporation paid $5,000 through quarterly deposits. 4. What is the amount of net income after income tax?
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Chapter 21 - Corporate Earnings and Capital Transactions
1. $2,650 Net Loss; 2. $-0-; 3. Debit Income Tax Refund Receivable $5,000, Credit Income Tax Expense, $5,000; 4. $2,650 Net Loss. Feedback:
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Learning Objective: 21-03 Record corporate adjusting and closing entries. Level: Medium Topic: Accounting for Corporate Earnings
21-63
Chapter 21 - Corporate Earnings and Capital Transactions
76. Selected transactions of the Hayward Corporation during 2013 and 2014 are given below. Record the transactions on page 6 of a general journal. Omit descriptions.
21-64
Chapter 21 - Corporate Earnings and Capital Transactions
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Learning Objective: 21-03 Record corporate adjusting and closing entries. Learning Objective: 21-05 Record the declaration and payment of cash dividends. Level: Medium Topic: Accounting for Corporate Earnings Topic: Accounting for Retained Earnings
21-65
Chapter 21 - Corporate Earnings and Capital Transactions
77. Selected transactions of the Streng Corporation during 2013 and 2014 are given below. Record the transactions on page 6 of a general journal. Omit descriptions.
21-66
Chapter 21 - Corporate Earnings and Capital Transactions
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Learning Objective: 21-03 Record corporate adjusting and closing entries. Learning Objective: 21-05 Record the declaration and payment of cash dividends. Level: Medium Topic: Accounting for Corporate Earnings Topic: Accounting for Retained Earnings
21-67
Chapter 21 - Corporate Earnings and Capital Transactions
78. The Dever Corporation is authorized to issue 3,000 shares of 8 percent, $50 par-value preferred stock and 10,000 shares of no-par-value common stock with a stated value of $20 per share. On December 31, 2013, 1,000 shares of preferred stock and 4,000 shares of common stock are issued and outstanding. The corporation's transactions affecting stockholders' equity during 2014 are given below. Record the transactions on page 8 of a general journal. Omit descriptions.
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Chapter 21 - Corporate Earnings and Capital Transactions
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-05 Record the declaration and payment of cash dividends. Learning Objective: 21-07 Record stock splits. Learning Objective: 21-08 Record appropriations of retained earnings. Learning Objective: 21-09 Record a corporation's receipt of donated assets. Learning Objective: 21-10 Record treasury stock transactions. Level: Medium Topic: Accounting for Retained Earnings Topic: Other Capital Transactions and Financial Statements
21-69
Chapter 21 - Corporate Earnings and Capital Transactions
79. The Santa Fe Corporation is authorized to issue 6,000 shares of 4 percent, $100 par-value preferred stock and 20,000 shares of no-par-value common stock with a stated value of $40 per share. On December 31, 2013, 2,000 shares of preferred stock and 8,000 shares of common stock are issued and outstanding. The corporation's transactions affecting stockholders' equity during 2014 are given below. Record the transactions on page 15 of a general journal. Omit descriptions.
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Chapter 21 - Corporate Earnings and Capital Transactions
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Chapter 21 - Corporate Earnings and Capital Transactions
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-05 Record the declaration and payment of cash dividends. Learning Objective: 21-07 Record stock splits. Learning Objective: 21-08 Record appropriations of retained earnings. Level: Medium Topic: Accounting for Retained Earnings Topic: Other Capital Transactions and Financial Statements
80. The Intrepid Corporation is authorized to issue 10,000 shares of 6 percent, $100 par-value preferred stock and 50,000 shares of $2 par-value common stock On December 31, 2013, 1,000 shares of preferred stock and 20,000 shares of common stock are issued and outstanding. The corporation's transactions affecting stockholders' equity during 2014 are given below. Record the transactions on page 8 of a general journal. Omit descriptions.
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Chapter 21 - Corporate Earnings and Capital Transactions
Feedback: Preferred dividend = 500 shares x 100 par x 4% = 2000. Common dividend = 40000 shares x 0.25 = 10000.
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Chapter 21 - Corporate Earnings and Capital Transactions
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-05 Record the declaration and payment of cash dividends. Learning Objective: 21-07 Record stock splits. Learning Objective: 21-08 Record appropriations of retained earnings. Level: Medium Topic: Accounting for Retained Earnings Topic: Other Capital Transactions and Financial Statements
81. The Topeka Corporation has 40,000 shares of $3 par value common stock outstanding. On July 1, the corporation declared a stock dividend payable July 31, 2014, to common stockholders of record on July 20, 2014, at the rate of one new share of common stock for each ten shares held. The estimated market value of the common stock is $36 per share. Record the transactions on page 15 of a general journal. Omit descriptions.
Feedback: Number of shares issued = 40000 x 10% = 4000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Level: Medium Topic: Accounting for Retained Earnings
21-74
Chapter 21 - Corporate Earnings and Capital Transactions
82. The following information was taken from the accounting records of the Gemini Corporation on December 31, 2013. Using this information, prepare the Stockholders' Equity section of the corporation's balance sheet.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-11 Prepare financial statements for a corporation. Level: Medium Topic: Other Capital Transactions and Financial Statements
21-75
Chapter 21 - Corporate Earnings and Capital Transactions
83. The following information was taken from the accounting records of the Goodens Corporation on December 31, 2013. Using this information, prepare the Stockholders' Equity section of the corporation's balance sheet.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-11 Prepare financial statements for a corporation. Level: Medium Topic: Other Capital Transactions and Financial Statements
21-76
Chapter 21 - Corporate Earnings and Capital Transactions
84. The following information was taken from the accounting records of the Arens Corporation on December 31, 2013. Using this information, prepare the Stockholders' Equity section of the corporation's balance sheet.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 21-11 Prepare financial statements for a corporation. Level: Medium Topic: Other Capital Transactions and Financial Statements
21-77
Chapter 21 - Corporate Earnings and Capital Transactions
Matching Questions
85. Match the accounting terms with the description by entering the proper number. 1. Equity account used to record par, or stated, value of shares to be issued as the result of the declaration Statement of of a stock dividend stockholders' equity. 6 2. A formal declaration of an intention to restrict dividends Donated capital. 11 3. The amount of taxes that will be payable in the future as a result of the difference between taxable income and income for financial statement purposes in the current year and in past years Paid-in capital. 4 4. Capital acquired from capital stock transactions Stock dividend. 12 5. The date on which the specific stockholders to Appropriation of receive a dividend are determined retained earnings. 2 6. A financial statement that provides an analysis Common Stock reconciling the beginning and ending balance of each Dividend Distributable of the stockholders' equity accounts account. 1 7. The total equity applicable to a class of stock divided by the number of shares outstanding Retained earnings. 9 8. When a corporation issues two or more shares of new stock to replace each share outstanding without making any changes in the capital accounts Stock split. 8 9. The cumulative profits and losses of the Extraordinary, corporation not distributed as dividends nonrecurring items. 10 10. Transactions that are highly unusual, clearly unrelated to routine operations, and that do not frequently occur Payment date. 15 11. Capital resulting from the receipt of gifts by a Stockholders of corporation record. 13 12. Distribution of the corporation's own stock on a pro rata basis that results in conversion of a portion of the firm's retained earnings to permanent capital Book value (stock). 7 13. Stockholders in whose name shares are held on date of record and who will receive a declared dividend Declaration date. 14 14. The date on which the board of directors declares a dividend Record date. 5 Statement of retained 15. The date that dividends are paid earnings. 16 16. A financial statement that shows all changes that have occurred in retained earnings during the period Treasury stock. 17 17. A corporation's own capital stock that has been issued and reacquired; the stock must have been Deferred income previously paid in full and issued to a stockholder taxes. 3
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Chapter 21 - Corporate Earnings and Capital Transactions
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 21-01 Estimate the federal corporate income tax and prepare related journal entries. Learning Objective: 21-02 Complete a worksheet for a corporation. Learning Objective: 21-03 Record corporate adjusting and closing entries. Learning Objective: 21-04 Prepare an income statement for a corporation. Learning Objective: 21-05 Record the declaration and payment of cash dividends. Learning Objective: 21-06 Record the declaration and issuance of stock dividends. Learning Objective: 21-07 Record stock splits. Learning Objective: 21-08 Record appropriations of retained earnings. Learning Objective: 21-09 Record a corporation's receipt of donated assets. Learning Objective: 21-10 Record treasury stock transactions. Learning Objective: 21-11 Prepare financial statements for a corporation. Level: Easy Topic: Accounting for Corporate Earnings Topic: Accounting for Retained Earnings Topic: Other Capital Transactions and Financial Statements
21-79
Chapter 22 - Long-Term Bonds
Chapter 22 Long-Term Bonds True / False Questions
1. The Bonds Payable account would be credited for $104,000 to record the issuance of $100,000 par value, 10 percent bonds at a market price of 104. True False
2. When a corporation pays bond interest, Bond Interest Expense is debited. True False
3. Amortizing bond premiums over the period from the issue date to the maturity date reduces bond interest expense shown on the income statement. True False
4. Any significant gain or loss from the early retirement of bonds should be shown as an extraordinary gain or loss on the income statement. True False
5. Investors will pay an amount greater than the face amount of a bond if the face interest rate on bonds is greater than the market interest rate. True False
6. When bonds are issued at a premium, the annual interest expense reported will be greater than the annual cash interest payments. True False
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Chapter 22 - Long-Term Bonds
7. To systematically accumulate cash for the retirement of bonds at maturity, a corporation may set up a bond sinking fund investment. True False
8. A corporation pays only the face value of its bonds if they are retired prior to the maturity date. True False
9. The Bond Sinking Fund Investment account is reported as an investment in the Assets section of the balance sheet. True False
10. When bonds are issued at a price below face value, the Discount on Bonds Payable account is credited for the difference between the issue price and the face value. True False
11. Interest on bonds must be paid in full even when the corporation operates at a loss. True False
12. Bond interest is not deducted when a corporation determines its taxable income. True False
13. In the case of liquidation, bondholders and other creditors must be paid in full before stockholders can receive anything. True False
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Chapter 22 - Long-Term Bonds
14. The issuing corporation has the right to require the owner of a convertible bond to surrender the bond for payment before the maturity date of the bond. True False
15. The face interest is the contractual interest specified on the bond. True False
16. The Bond Interest Expense account is usually listed under Operating Expenses on the income statement. True False
17. The adjusting entry to record accrued bond interest is reversed on the first day of the following period. True False
18. If the market rate of interest on the day that bonds are issued is lower than the face rate of interest, the bonds will sell at a discount. True False
19. When bonds are sold at a market price of 105, the cash received for the bonds is 105 percent of face value. True False
20. Retained earnings may be appropriated for bond retirement by order of the board of directors, by the bond contract, or by vote of the shareholders. True False
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Chapter 22 - Long-Term Bonds
Fill in the Blank Questions
21. Bond interest expense usually appears in the _____________________________ section of the income statement. ________________________________________
22. To pay interest on ____________________ bonds, the corporation must keep a record of the name of each bondholder. ________________________________________
23. When bonds are issued at a price below face value, the Discount on Bonds Payable account is ____________________ for the difference between the issue price and the face value. ________________________________________
24. The balance of the Bonds Payable account plus the balance of the Premium on Bonds Payable account or minus the balance of the Discount on Bonds Payable account is called the ____________________ value of the bonds. ________________________________________
25. Bonds on which a corporation has pledged property to guarantee payment to the bondholders are known as ____________________ bonds. ________________________________________
26. If bonds with a face value of $100,000 and a carrying value of $103,000 are retired early by paying a price of $101,000, an extraordinary ____________________ will be reported on the income statement for the period. ________________________________________
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Chapter 22 - Long-Term Bonds
27. The Discount on Bonds Payable account will have a(n) ____________________ balance. ________________________________________
28. The straight-line amortization method amortizes ____________________ amounts of the premium each month. ________________________________________
29. In the interest formula (I = Prt) the Prt stands for __________________________. ________________________________________
30. Using borrowed funds to earn a profit greater than the interest that must be paid on the bonds is called trading on the equity, or ___________________. ________________________________________
31. The investment banker who acts to protect the bondholders' interests, as in the case of default, is called a ___________________. ________________________________________
32. Coupon bonds are often referred to as ____________________ bonds. ________________________________________
33. The issuing corporation ___________________ the bond discount from the date of issue to the maturity date. Here a bond issued at a discount will increases the bond interest expense shown on the income statement. ________________________________________
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Chapter 22 - Long-Term Bonds
34. A bond is ____________________ if the issuing corporation has the right to require the owner to surrender the bond for payment before the maturity date. ________________________________________
35. A planned fund established to accumulate assets to pay off bonds when they mature is called a bond ____________________ fund investment. ________________________________________
Multiple Choice Questions
36. When bonds mature, a corporation will pay the bondholders A. the current market value of the bonds. B. the face amount plus the original premium or minus the original discount. C. the face amount plus the interest accrued since the date the bonds were issued. D. the face amount of the bonds.
37. If bonds are issued for a price below their face value, the bond discount should be A. charged to expense on the date the bonds are issued. B. amortized over the life of the bond issue. C. shown as an addition to Bonds Payable in the Long-Term Liabilities section of the balance sheet. D. shown as a current liability on the balance sheet.
38. A corporation paid $104,000 to retire bonds with a face value of $100,000 and an unamortized premium balance of $3,000. The entry to record the early retirement of the bonds will include the recognition of a loss of A. $7,000. B. $4,000. C. $1,000. D. $3,000.
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Chapter 22 - Long-Term Bonds
39. A corporation paid $104,000 to retire bonds with a face value of $100,000 and an unamortized discount balance of $3,000. The entry to record the early retirement of the bonds will include the recognition of a loss of A. $7,000. B. $4,000. C. $1,000. D. $3,000.
40. On December 31, 2013, a corporation issued $200,000 face value, 12 percent bonds that mature 10 years from the date of issue. The issue price was 97. If the firm uses the straightline method of amortization, interest expense for 2014 will be reported at A. $24,600. B. $24,000. C. $23,400. D. $19,400.
41. On December 31, 2013, a corporation issued $200,000 face value, 12 percent bonds that mature 10 years from the date of issue. The issue price was 103. If the firm uses the straightline method of amortization, interest expense for 2014 will be reported at A. $24,600. B. $24,000. C. $23,400. D. $19,400.
42. Bonds with a face value of $200,000 were issued at 103. The entry to record the issuance will include a credit to the Bonds Payable account for A. $206,000. B. $200,000. C. $103,000. D. $230,000.
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Chapter 22 - Long-Term Bonds
43. Bonds with a face value of $200,000 were issued at 103. The entry to record the issuance will include a debit to the Cash account for A. $206,000. B. $200,000. C. $103,000. D. $230,000.
44. The Premium on Bonds Payable account is shown A. in the Current Assets section of the balance sheet. B. in the Current Liabilities section of the balance sheet. C. in the Long-Term Liabilities section of the balance sheet. D. in the Revenue section of the income statement.
45. Which of the following is not a disadvantage of raising capital through the issue of bonds payable? A. the bonds are classified as a long-term liability B. interest must be paid even if the firm suffers a loss C. the face amount must be repaid at maturity D. interest is deductible for income tax purposes
46. The entry to record the adjustment for accrued bond interest includes A. a debit to Bond Interest Expense and a credit to Cash. B. a debit to Bond Interest Expense and a credit to Bond Interest Payable. C. a debit to Bond Interest Payable and a credit to the Bond Interest Expense. D. a debit to Bond Interest Expense and a credit to Bonds Payable.
47. When bonds are issued at a premium, the bond premium A. reduces the amount of interest expense over the life of the bonds. B. increases the amount of interest expense over the life of the bonds. C. does not change the amount of interest expense over the life of the bonds. D. is charged to interest expense when the bond is issued.
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Chapter 22 - Long-Term Bonds
48. Bonds with a face value of $400,000 were issued at 98. The entry to record the issuance will include a credit to the Bonds Payable account for A. $408,000. B. $392,000. C. $400,000. D. $398,000.
49. Bonds with a face value of $400,000 were issued at 98. The entry to record the issuance will include a debit to the Cash account for A. $408,000. B. $400,000. C. $398,000. D. $392,000.
50. Bonds with a face value of $400,000 were issued at 98. The entry to record the issuance will include a debit to the Discount on Bonds Payable account for A. $2,000. B. $4,000. C. $6,000. D. $8,000.
51. The entry to record the issuance of bonds at face value includes A. a credit to Bond Interest Payable. B. a credit to Bond Payable. C. a debit to Bond Interest Expense. D. a debit to Bond Interest Payable.
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Chapter 22 - Long-Term Bonds
52. A bond sinking fund investment is started on January 5, 2013, by transferring $10,000 in cash to the fund. This $10,000 is invested and earns $1,100 during 2013. The entry to record the earnings made on the sinking fund investment includes A. a debit to Cash for $1,100 and a credit to Income from Sinking Fund Investment for $1,100. B. a debit to Cash for $1,100 and a credit to Bond Sinking Fund Investment for $1,100. C. a debit to Bond Sinking Fund Investment for $1,100 and a credit to Income from Sinking Fund Investment for $1,100. D. a debit to Cash for $1,100 and a credit to Interest Income for $1,100.
53. A bond sinking fund investment is started on January 5, 2013, by transferring $12,000 in cash to the fund. This $12,000 is invested and earns $1,500 during 2013. On January 5, 2014, the amount of cash transferred to the sinking fund investment will be A. $10,500. B. $12,000. C. $13,500. D. $1,500.
54. The corporation must maintain a subsidiary ledger showing who owns the bonds and is entitled to receive interest payments if the bonds are A. coupon bonds. B. registered bonds. C. bearer bonds. D. unregistered bonds.
55. When the issuing corporation has the right to require the owners to surrender the bonds for payment before the maturity date of the bonds, the bonds are referred to as A. serial bonds. B. convertible bonds. C. registered bonds. D. callable bonds.
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Chapter 22 - Long-Term Bonds
56. If a bond is a registered bond, it can NOT be a ___________ bond. A. discount B. callable C. convertible D. coupon
57. Using borrowed funds to earn a profit higher than the interest charged for borrowing is called A. leveraging. B. amortizing. C. investing. D. secured borrowing.
58. Corporations with many bondholders will open a separate checking account because A. it is required by law. B. the account earns interest. C. it is easier to do the bookkeeping on the bond interest. D. it keeps the bond interest records separate for tax purposes.
59. In the interest formula I = Prt, the P stands for A. Payment. B. Principal. C. Premium. D. Prime number.
60. Bonds issued at a premium are A. traded for stock. B. sold at face value. C. sold at less than face value. D. sold for more than face value.
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Chapter 22 - Long-Term Bonds
61. If market interest rates are higher than the rate offered on the bonds being sold, they will be sold at A. a premium. B. a discount. C. face value. D. a loss.
62. Retained earnings are often appropriated while the bonds are outstanding. Which of the following is a reason for the appropriation? A. Corporation management wants to protect the bondholders. B. The bond contract or the board of directors requires it. C. Tax law requires it. D. The buyers require it.
63. Retained Earnings Appropriated for Bond Retirement appears as a separate line item A. on the Income Statement. B. on the Balance Sheet. C. on the Bond Interest Reconciliation Schedule. D. on the Statement of Cash Flows.
64. The difference between the face value and the selling price of a 10-year discounted bond sold two years after authorization, is amortized for A. 10 years. B. 8 years. C. 2 years. D. The difference is not amortized, only interest is amortized.
65. The amortization of the bond discount __________ the carrying value of the bond, while the amortization of the bond premium __________ the carrying value of the bond. A. decreases, increases B. increases, decreases C. increases, increases D. decreases, decreases
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Chapter 22 - Long-Term Bonds
Short Answer Questions
66. The board of directors of the Lawrence Corporation authorized the issuance of $500,000 face value of 10-year, 12 percent bonds dated May 1, 2013, and maturing on May 1, 2023. Interest is payable semiannually on May 1 and November 1. Record the following bond transactions on page 5 of a general journal. Omit descriptions.
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Chapter 22 - Long-Term Bonds
67. The board of directors of the Costmore Corporation authorized the issuance of $1,200,000 face value of 5-year, 8 percent bonds dated March 1, 2013, and maturing on March 1, 2015. Interest is payable semiannually on September 1 and March 1. Record the following bond transactions on page 6 of a general journal. Omit descriptions.
68. On September 1, 2014, a corporation paid $612,000 to retire bonds with a face value of $600,000 and an unamortized bond discount of $20,000. Record the transaction on page 8 of a general journal. Omit the description.
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Chapter 22 - Long-Term Bonds
69. On September 1, 2014, a corporation paid $620,000 to retire bonds with a face value of $600,000 and an unamortized bond premium of $10,000. Record the transaction on page 8 of a general journal. Omit the description.
70. The board of directors of the Columbus Corporation authorized the issuance of $400,000 face value of 10-year, 12 percent bonds dated April 1, 2013, and maturing on April 1, 2023. Interest is payable semiannually on April 1 and October 1. Each bond has a face value of $1,000. Because the funds to be raised were not immediately needed, no bonds were issued until 2015. Record the following transactions on page 8 of a general journal. Omit descriptions.
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Chapter 22 - Long-Term Bonds
71. The board of directors of the Merced Corporation authorized the issuance of $200,000 face value of 10-year, 12 percent bonds dated April 1, 2013, and maturing on April 1, 2023. Interest is payable semiannually on April 1 and October 1. Each bond has a face value of $1,000. Because the funds to be raised were not immediately needed, no bonds were issued until 2015. Record the following transactions on page 9 of a general journal. Omit descriptions.
72. The Mammoth Corporation issued $800,000 face value of 10-year, 12 percent bonds dated April 1, 2013, and maturing on April 1, 2023. Interest is payable semiannually on April 1 and October 1. The bonds were issued at a price of 98. Record the transactions to issue the bonds on April 1, 2013, and to pay interest and amortize the bond discount on October 1, on page 9 of a general journal. Omit descriptions.
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Chapter 22 - Long-Term Bonds
73. The Crowley Corporation issued $600,000 face value of 10-year, 8 percent bonds dated April 1, 2013, and maturing on April 1, 2023. Interest is payable semiannually on April 1 and October 1. The bonds were issued at a price of 103. Record the transactions to issue the bonds on April 1, 2013, and to pay interest and amortize the bond discount on October 1, on page 9 of a general journal. Omit descriptions.
74. The Morris Corporation has outstanding $300,000 face value of 12 percent bonds payable dated January 1, 2013, and maturing 10 years later on January 1, 2023. The corporation is required under the bond contract to transfer $30,000 each year to a bond sinking fund investment. The cash in the sinking fund investment is invested to earn interest. Record the following entries on page 6 of a general journal. Omit descriptions.
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Chapter 22 - Long-Term Bonds
75. Bonds payable and mortgage loans are both long-term debt instruments. (a) How do bonds payable differ from notes payable? (b) Define bonds payable. (Include in your definition several characteristics and types of bonds payable.)
76. Using the following format, compare capital stock and bonds as means of financing. List characteristics and differences.
77. The adjusting entry for Barstow Corporation on September 30, 2013 (the end of the fiscal year) to accrue three months of bond interest due is as follows. Interest is paid on June 30 and December 31.
Make the entry to reverse this accrual. Include the proper date for the entry.
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Chapter 22 - Long-Term Bonds
78. Lee Corporation has 10-year, 12% bonds payable of $100,000 that were sold on January 2, 2013 at a premium of $15,000. The amortization on the premium is recorded at the end of every year. Determine the Balance Sheet presentation of these bonds at December 31, 2015. (Present only the section of the Balance Sheet in which the bonds appear.)
79. Morris Corporation has 10-year, 12% bonds Payable of $100,000 that were sold on January 2, 2013 at a discount of $15,000. Amortization on the discount is recorded at the end of each year. Determine the Balance Sheet presentation of these bonds at December 31, 2014. (Present only the section of the Balance Sheet in which the bonds appear.)
80. When bonds are sold by a company, the company assumes debt. The principal of which is the amount of the face value of the bonds sold. Cash to pay this debt must be available when the bonds become due. Discuss things a company can do in order to have the funds available to pay the bond debt on the due date.
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Chapter 22 - Long-Term Bonds
81. What are the four things that must be done to remove the bonds from the books in an early retirement? (This is the second step. Step one is to amortize the discount or premium on the bonds up to the date of retirement.)
82. What is the early retirement of bonds? There are two ways that the early retirement of bonds can come about. What are they?
83. Compare convertible and callable bonds by listing their characteristics in the following format.
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Chapter 22 - Long-Term Bonds
84. Trog Industries pays and records the semiannual interest on its $500,000, 10-year, 6% bonds outstanding on July 1, 2013. On the same date, amortization of the premium of $5,000 received on $100,000 of those bonds. Prepare the journal entries recorded by Trog Industries.
85. Galoot Corporation pays and records the semiannual interest on its $500,000, 10-year, 6% bonds outstanding on July 1, 2013. On the same date, amortization of the discount of $10,000 received on $200,000 of those bonds. Prepare the journal entries recorded by Galoot Corporation.
86. Twee Corporation creates a bond sinking fund on July 1, 2013, the first day of its fiscal year in preparation of payment of principal of $300,000 due in six years. Twee makes a $50,000 cash deposit into the account and invests it in an oil stock fund. During the year, $4,400 is earned on this investment. Fund administrative expenses for this fund amount to $50. Record the journal entry for the creation of this fund, the earnings on the investment, and for the required amount of investment into the sinking fund at the beginning of the second year.
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Chapter 22 - Long-Term Bonds
87. Dweeb Industries decided to appropriate $40,000 of retained earnings during each of the last five years its $200,000 bonds are outstanding. Prepare the journal entry to record the initial appropriation and at retirement of the bonds on October 1, 2015.
88. On April 1, 2015, Flummery Corporation purchased on the open market $100,000 of its 10-year 7% (interest paid semiannually) bonds and retired them. They are purchased at $102,000. These bonds were originally sold at their $100,000 face value on January 2, 2013. Prepare the journal entries necessary for this transaction.
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Chapter 22 - Long-Term Bonds
Matching Questions
89. Match the following definitions with the proper terms. 1. A bond contract 2. Cost incurred in issuing bonds (i.e., legal and accounting fees, printing costs) 3. The removal of the bond liability from the company's books when paid 4. Bearer bonds 5. Bonds that give the bondholder the right to exchange their bonds for common stock under specified conditions 6. The book value of bonds (principal plus premium or principal less discount) 7. A fund established for the purpose of putting cash in to pay off bonds when due 8. Bonds secured by the pledge of securities (i.e., stocks, bonds of another company) 9. Long-term debt instruments 10. Bonds that allow the issuing corporation to retire the bonds prior to their maturity date
22-23
Bonds payable. ____ Callable bonds. ____ Bond sinking fund investment. ____ Carrying value of bonds. ____
Bond retirement. ____ Collateral trust bonds. ____ Bond issue costs. ____ Convertible bonds. ____ Bond indenture. ____ Coupon bonds. ____
Chapter 22 - Long-Term Bonds
90. Match the following definitions with the proper terms. 1. The excess of the face value over the price received by a company for bonds 2. The excess of the price paid over the face value of a bond 3. The amount the company must pay for the bond when it is called 4. Bonds issued at one time but payable over a period of time 5. The interest rate a corporation is willing to pay and investors will accept 6. Using borrowed funds to earn a profit greater than the interest paid on borrowing 7. The contractual interest specified on the bond 8. Bonds issued to a party whose name is listed in the corporation's records 9. Unsecured bonds backed only by a corporation's general credit 10. Bonds for which property is pledged to secure the bondholders' claims
22-24
debentures ____ call price ____ serial bonds ____ discount on bonds payable ____ secured bonds ____ face interest rate ____ registered bonds ____ leveraging ____ premium on bonds payable ____ market interest rate ____
Chapter 22 - Long-Term Bonds
Chapter 22 Long-Term Bonds Answer Key
True / False Questions
1. The Bonds Payable account would be credited for $104,000 to record the issuance of $100,000 par value, 10 percent bonds at a market price of 104. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-03 Record the issuance of bonds. Level: Easy Topic: Bond Issue and Interest
2. When a corporation pays bond interest, Bond Interest Expense is debited. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-04 Record the payment of interest on bonds. Level: Easy Topic: Bond Issue and Interest
3. Amortizing bond premiums over the period from the issue date to the maturity date reduces bond interest expense shown on the income statement. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-06 Compute and record the periodic amortization of a bond premium. Level: Easy Topic: Bond Issue and Interest
22-25
Chapter 22 - Long-Term Bonds
4. Any significant gain or loss from the early retirement of bonds should be shown as an extraordinary gain or loss on the income statement. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-10 Record retirement of bonds payable. Level: Easy Topic: Bond Retirement
5. Investors will pay an amount greater than the face amount of a bond if the face interest rate on bonds is greater than the market interest rate. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 22-07 Compute and record the periodic amortization of a bond discount. Level: Easy Topic: Bond Issue and Interest
6. When bonds are issued at a premium, the annual interest expense reported will be greater than the annual cash interest payments. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-07 Compute and record the periodic amortization of a bond discount. Level: Easy Topic: Bond Issue and Interest
7. To systematically accumulate cash for the retirement of bonds at maturity, a corporation may set up a bond sinking fund investment. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-08 Record the transactions of a bond sinking fund investment. Level: Easy Topic: Bond Retirement
22-26
Chapter 22 - Long-Term Bonds
8. A corporation pays only the face value of its bonds if they are retired prior to the maturity date. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-10 Record retirement of bonds payable. Level: Easy Topic: Bond Retirement
9. The Bond Sinking Fund Investment account is reported as an investment in the Assets section of the balance sheet. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-08 Record the transactions of a bond sinking fund investment. Level: Easy Topic: Bond Retirement
22-27
Chapter 22 - Long-Term Bonds
10. When bonds are issued at a price below face value, the Discount on Bonds Payable account is credited for the difference between the issue price and the face value. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-03 Record the issuance of bonds. Level: Medium Topic: Bond Issue and Interest
11. Interest on bonds must be paid in full even when the corporation operates at a loss. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-02 Explain the advantages and disadvantages of using bonds as a method of financing. Level: Easy Topic: Financing Through Bonds
12. Bond interest is not deducted when a corporation determines its taxable income. FALSE
AACSB: Analytic AICPA BB: Legal Bloom's: Remember Learning Objective: 22-02 Explain the advantages and disadvantages of using bonds as a method of financing. Level: Easy Topic: Financing Through Bonds
13. In the case of liquidation, bondholders and other creditors must be paid in full before stockholders can receive anything. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 22-01 Name and define the various types of bonds. Level: Easy Topic: Financing Through Bonds
22-28
Chapter 22 - Long-Term Bonds
14. The issuing corporation has the right to require the owner of a convertible bond to surrender the bond for payment before the maturity date of the bond. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 22-01 Name and define the various types of bonds. Level: Easy Topic: Financing Through Bonds
15. The face interest is the contractual interest specified on the bond. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-01 Name and define the various types of bonds. Level: Easy Topic: Financing Through Bonds
16. The Bond Interest Expense account is usually listed under Operating Expenses on the income statement. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-04 Record the payment of interest on bonds. Learning Objective: 22-05 Record the accrual of interest on bonds. Level: Easy Topic: Bond Issue and Interest
17. The adjusting entry to record accrued bond interest is reversed on the first day of the following period. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-05 Record the accrual of interest on bonds. Level: Easy Topic: Bond Issue and Interest
22-29
Chapter 22 - Long-Term Bonds
18. If the market rate of interest on the day that bonds are issued is lower than the face rate of interest, the bonds will sell at a discount. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 22-03 Record the issuance of bonds. Level: Easy Topic: Bond Issue and Interest
19. When bonds are sold at a market price of 105, the cash received for the bonds is 105 percent of face value. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 22-03 Record the issuance of bonds. Level: Easy Topic: Bond Issue and Interest
20. Retained earnings may be appropriated for bond retirement by order of the board of directors, by the bond contract, or by vote of the shareholders. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 22-09 Record an increase or decrease in retained earnings appropriated for bond retirement. Level: Easy Topic: Bond Retirement
22-30
Chapter 22 - Long-Term Bonds
Fill in the Blank Questions
21. Bond interest expense usually appears in the _____________________________ section of the income statement. Other Expenses (nonoperating expenses)
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-05 Record the accrual of interest on bonds. Level: Easy Topic: Bond Issue and Interest
22. To pay interest on ____________________ bonds, the corporation must keep a record of the name of each bondholder. registered
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 22-01 Name and define the various types of bonds. Learning Objective: 22-11 Define the accounting terms new to this chapter. Level: Easy Topic: Bond Retirement Topic: Financing Through Bonds
23. When bonds are issued at a price below face value, the Discount on Bonds Payable account is ____________________ for the difference between the issue price and the face value. debited
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-03 Record the issuance of bonds. Learning Objective: 22-07 Compute and record the periodic amortization of a bond discount. Level: Easy Topic: Bond Issue and Interest Topic: Bond Retirement
22-31
Chapter 22 - Long-Term Bonds
24. The balance of the Bonds Payable account plus the balance of the Premium on Bonds Payable account or minus the balance of the Discount on Bonds Payable account is called the ____________________ value of the bonds. book; carrying
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-03 Record the issuance of bonds. Level: Easy Topic: Bond Issue and Interest
25. Bonds on which a corporation has pledged property to guarantee payment to the bondholders are known as ____________________ bonds. secured
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 22-01 Name and define the various types of bonds. Learning Objective: 22-11 Define the accounting terms new to this chapter. Level: Easy Topic: Bond Retirement Topic: Financing Through Bonds
26. If bonds with a face value of $100,000 and a carrying value of $103,000 are retired early by paying a price of $101,000, an extraordinary ____________________ will be reported on the income statement for the period. gain
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 22-10 Record retirement of bonds payable. Level: Easy Topic: Bond Retirement
22-32
Chapter 22 - Long-Term Bonds
27. The Discount on Bonds Payable account will have a(n) ____________________ balance. debit
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-03 Record the issuance of bonds. Level: Easy Topic: Bond Issue and Interest
28. The straight-line amortization method amortizes ____________________ amounts of the premium each month. equal
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-06 Compute and record the periodic amortization of a bond premium. Learning Objective: 22-11 Define the accounting terms new to this chapter. Level: Easy Topic: Bond Issue and Interest Topic: Bond Retirement
29. In the interest formula (I = Prt) the Prt stands for __________________________. Principal, Rate, Time
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 22-04 Record the payment of interest on bonds. Level: Easy Topic: Bond Issue and Interest
22-33
Chapter 22 - Long-Term Bonds
30. Using borrowed funds to earn a profit greater than the interest that must be paid on the bonds is called trading on the equity, or ___________________. leveraging
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 22-02 Explain the advantages and disadvantages of using bonds as a method of financing. Learning Objective: 22-11 Define the accounting terms new to this chapter. Level: Easy Topic: Bond Retirement Topic: Financing Through Bonds
31. The investment banker who acts to protect the bondholders' interests, as in the case of default, is called a ___________________. trustee
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 22-01 Name and define the various types of bonds. Level: Easy Topic: Financing Through Bonds
32. Coupon bonds are often referred to as ____________________ bonds. bearer
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-01 Name and define the various types of bonds. Learning Objective: 22-11 Define the accounting terms new to this chapter. Level: Easy Topic: Bond Retirement Topic: Financing Through Bonds
22-34
Chapter 22 - Long-Term Bonds
33. The issuing corporation ___________________ the bond discount from the date of issue to the maturity date. Here a bond issued at a discount will increases the bond interest expense shown on the income statement. amortizes
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-07 Compute and record the periodic amortization of a bond discount. Level: Easy Topic: Bond Issue and Interest
34. A bond is ____________________ if the issuing corporation has the right to require the owner to surrender the bond for payment before the maturity date. callable
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-01 Name and define the various types of bonds. Learning Objective: 22-11 Define the accounting terms new to this chapter. Level: Easy Topic: Bond Retirement Topic: Financing Through Bonds
35. A planned fund established to accumulate assets to pay off bonds when they mature is called a bond ____________________ fund investment. sinking
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-08 Record the transactions of a bond sinking fund investment. Level: Easy Topic: Bond Retirement
22-35
Chapter 22 - Long-Term Bonds
Multiple Choice Questions
36. When bonds mature, a corporation will pay the bondholders A. the current market value of the bonds. B. the face amount plus the original premium or minus the original discount. C. the face amount plus the interest accrued since the date the bonds were issued. D. the face amount of the bonds.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-10 Record retirement of bonds payable. Level: Easy Topic: Bond Retirement
37. If bonds are issued for a price below their face value, the bond discount should be A. charged to expense on the date the bonds are issued. B. amortized over the life of the bond issue. C. shown as an addition to Bonds Payable in the Long-Term Liabilities section of the balance sheet. D. shown as a current liability on the balance sheet.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-07 Compute and record the periodic amortization of a bond discount. Level: Easy Topic: Bond Issue and Interest
38. A corporation paid $104,000 to retire bonds with a face value of $100,000 and an unamortized premium balance of $3,000. The entry to record the early retirement of the bonds will include the recognition of a loss of A. $7,000. B. $4,000. C. $1,000. D. $3,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-10 Record retirement of bonds payable. Level: Medium Topic: Bond Retirement
22-36
Chapter 22 - Long-Term Bonds
39. A corporation paid $104,000 to retire bonds with a face value of $100,000 and an unamortized discount balance of $3,000. The entry to record the early retirement of the bonds will include the recognition of a loss of A. $7,000. B. $4,000. C. $1,000. D. $3,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-10 Record retirement of bonds payable. Level: Medium Topic: Bond Retirement
40. On December 31, 2013, a corporation issued $200,000 face value, 12 percent bonds that mature 10 years from the date of issue. The issue price was 97. If the firm uses the straightline method of amortization, interest expense for 2014 will be reported at A. $24,600. B. $24,000. C. $23,400. D. $19,400.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-07 Compute and record the periodic amortization of a bond discount. Level: Medium Topic: Bond Issue and Interest
22-37
Chapter 22 - Long-Term Bonds
41. On December 31, 2013, a corporation issued $200,000 face value, 12 percent bonds that mature 10 years from the date of issue. The issue price was 103. If the firm uses the straightline method of amortization, interest expense for 2014 will be reported at A. $24,600. B. $24,000. C. $23,400. D. $19,400.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-07 Compute and record the periodic amortization of a bond discount. Level: Medium Topic: Bond Issue and Interest
42. Bonds with a face value of $200,000 were issued at 103. The entry to record the issuance will include a credit to the Bonds Payable account for A. $206,000. B. $200,000. C. $103,000. D. $230,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-03 Record the issuance of bonds. Level: Medium Topic: Bond Issue and Interest
43. Bonds with a face value of $200,000 were issued at 103. The entry to record the issuance will include a debit to the Cash account for A. $206,000. B. $200,000. C. $103,000. D. $230,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-03 Record the issuance of bonds. Level: Medium Topic: Bond Issue and Interest
22-38
Chapter 22 - Long-Term Bonds
44. The Premium on Bonds Payable account is shown A. in the Current Assets section of the balance sheet. B. in the Current Liabilities section of the balance sheet. C. in the Long-Term Liabilities section of the balance sheet. D. in the Revenue section of the income statement.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-03 Record the issuance of bonds. Level: Easy Topic: Bond Issue and Interest
45. Which of the following is not a disadvantage of raising capital through the issue of bonds payable? A. the bonds are classified as a long-term liability B. interest must be paid even if the firm suffers a loss C. the face amount must be repaid at maturity D. interest is deductible for income tax purposes
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 22-02 Explain the advantages and disadvantages of using bonds as a method of financing. Level: Easy Topic: Financing Through Bonds
46. The entry to record the adjustment for accrued bond interest includes A. a debit to Bond Interest Expense and a credit to Cash. B. a debit to Bond Interest Expense and a credit to Bond Interest Payable. C. a debit to Bond Interest Payable and a credit to the Bond Interest Expense. D. a debit to Bond Interest Expense and a credit to Bonds Payable.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-05 Record the accrual of interest on bonds. Level: Easy Topic: Bond Issue and Interest
22-39
Chapter 22 - Long-Term Bonds
47. When bonds are issued at a premium, the bond premium A. reduces the amount of interest expense over the life of the bonds. B. increases the amount of interest expense over the life of the bonds. C. does not change the amount of interest expense over the life of the bonds. D. is charged to interest expense when the bond is issued.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-06 Compute and record the periodic amortization of a bond premium. Level: Easy Topic: Bond Issue and Interest
48. Bonds with a face value of $400,000 were issued at 98. The entry to record the issuance will include a credit to the Bonds Payable account for A. $408,000. B. $392,000. C. $400,000. D. $398,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 22-03 Record the issuance of bonds. Level: Easy Topic: Bond Issue and Interest
49. Bonds with a face value of $400,000 were issued at 98. The entry to record the issuance will include a debit to the Cash account for A. $408,000. B. $400,000. C. $398,000. D. $392,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-03 Record the issuance of bonds. Level: Medium Topic: Bond Issue and Interest
22-40
Chapter 22 - Long-Term Bonds
50. Bonds with a face value of $400,000 were issued at 98. The entry to record the issuance will include a debit to the Discount on Bonds Payable account for A. $2,000. B. $4,000. C. $6,000. D. $8,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-03 Record the issuance of bonds. Level: Medium Topic: Bond Issue and Interest
51. The entry to record the issuance of bonds at face value includes A. a credit to Bond Interest Payable. B. a credit to Bond Payable. C. a debit to Bond Interest Expense. D. a debit to Bond Interest Payable.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 22-03 Record the issuance of bonds. Level: Easy Topic: Bond Issue and Interest
52. A bond sinking fund investment is started on January 5, 2013, by transferring $10,000 in cash to the fund. This $10,000 is invested and earns $1,100 during 2013. The entry to record the earnings made on the sinking fund investment includes A. a debit to Cash for $1,100 and a credit to Income from Sinking Fund Investment for $1,100. B. a debit to Cash for $1,100 and a credit to Bond Sinking Fund Investment for $1,100. C. a debit to Bond Sinking Fund Investment for $1,100 and a credit to Income from Sinking Fund Investment for $1,100. D. a debit to Cash for $1,100 and a credit to Interest Income for $1,100.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-08 Record the transactions of a bond sinking fund investment. Level: Medium Topic: Bond Retirement
22-41
Chapter 22 - Long-Term Bonds
53. A bond sinking fund investment is started on January 5, 2013, by transferring $12,000 in cash to the fund. This $12,000 is invested and earns $1,500 during 2013. On January 5, 2014, the amount of cash transferred to the sinking fund investment will be A. $10,500. B. $12,000. C. $13,500. D. $1,500.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 22-08 Record the transactions of a bond sinking fund investment. Level: Easy Topic: Bond Retirement
54. The corporation must maintain a subsidiary ledger showing who owns the bonds and is entitled to receive interest payments if the bonds are A. coupon bonds. B. registered bonds. C. bearer bonds. D. unregistered bonds.
AACSB: Analytic AICPA FN: Risk Analysis Bloom's: Remember Learning Objective: 22-01 Name and define the various types of bonds. Level: Easy Topic: Financing Through Bonds
55. When the issuing corporation has the right to require the owners to surrender the bonds for payment before the maturity date of the bonds, the bonds are referred to as A. serial bonds. B. convertible bonds. C. registered bonds. D. callable bonds.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-01 Name and define the various types of bonds. Learning Objective: 22-11 Define the accounting terms new to this chapter. Level: Easy Topic: Bond Retirement Topic: Financing Through Bonds
22-42
Chapter 22 - Long-Term Bonds
56. If a bond is a registered bond, it can NOT be a ___________ bond. A. discount B. callable C. convertible D. coupon
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-01 Name and define the various types of bonds. Level: Easy Topic: Financing Through Bonds
57. Using borrowed funds to earn a profit higher than the interest charged for borrowing is called A. leveraging. B. amortizing. C. investing. D. secured borrowing.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-02 Explain the advantages and disadvantages of using bonds as a method of financing. Learning Objective: 22-11 Define the accounting terms new to this chapter. Level: Easy Topic: Bond Retirement Topic: Financing Through Bonds
58. Corporations with many bondholders will open a separate checking account because A. it is required by law. B. the account earns interest. C. it is easier to do the bookkeeping on the bond interest. D. it keeps the bond interest records separate for tax purposes.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-04 Record the payment of interest on bonds. Level: Easy Topic: Bond Issue and Interest
22-43
Chapter 22 - Long-Term Bonds
59. In the interest formula I = Prt, the P stands for A. Payment. B. Principal. C. Premium. D. Prime number.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 22-04 Record the payment of interest on bonds. Level: Easy Topic: Bond Issue and Interest
60. Bonds issued at a premium are A. traded for stock. B. sold at face value. C. sold at less than face value. D. sold for more than face value.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-06 Compute and record the periodic amortization of a bond premium. Learning Objective: 22-11 Define the accounting terms new to this chapter. Level: Easy Topic: Bond Issue and Interest Topic: Bond Retirement
61. If market interest rates are higher than the rate offered on the bonds being sold, they will be sold at A. a premium. B. a discount. C. face value. D. a loss.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 22-07 Compute and record the periodic amortization of a bond discount. Level: Easy Topic: Bond Issue and Interest
22-44
Chapter 22 - Long-Term Bonds
62. Retained earnings are often appropriated while the bonds are outstanding. Which of the following is a reason for the appropriation? A. Corporation management wants to protect the bondholders. B. The bond contract or the board of directors requires it. C. Tax law requires it. D. The buyers require it.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 22-09 Record an increase or decrease in retained earnings appropriated for bond retirement. Level: Easy Topic: Bond Retirement
63. Retained Earnings Appropriated for Bond Retirement appears as a separate line item A. on the Income Statement. B. on the Balance Sheet. C. on the Bond Interest Reconciliation Schedule. D. on the Statement of Cash Flows.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-09 Record an increase or decrease in retained earnings appropriated for bond retirement. Level: Easy Topic: Bond Retirement
64. The difference between the face value and the selling price of a 10-year discounted bond sold two years after authorization, is amortized for A. 10 years. B. 8 years. C. 2 years. D. The difference is not amortized, only interest is amortized.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 22-06 Compute and record the periodic amortization of a bond premium. Level: Easy Topic: Bond Issue and Interest
22-45
Chapter 22 - Long-Term Bonds
65. The amortization of the bond discount __________ the carrying value of the bond, while the amortization of the bond premium __________ the carrying value of the bond. A. decreases, increases B. increases, decreases C. increases, increases D. decreases, decreases
AACSB: Analytic AICPA FN: Reporting Bloom's: Analyze Learning Objective: 22-07 Compute and record the periodic amortization of a bond discount. Level: Medium Topic: Bond Issue and Interest
Short Answer Questions
22-46
Chapter 22 - Long-Term Bonds
66. The board of directors of the Lawrence Corporation authorized the issuance of $500,000 face value of 10-year, 12 percent bonds dated May 1, 2013, and maturing on May 1, 2023. Interest is payable semiannually on May 1 and November 1. Record the following bond transactions on page 5 of a general journal. Omit descriptions.
22-47
Chapter 22 - Long-Term Bonds
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-03 Record the issuance of bonds. Learning Objective: 22-04 Record the payment of interest on bonds. Learning Objective: 22-05 Record the accrual of interest on bonds. Level: Medium Topic: Bond Issue and Interest
22-48
Chapter 22 - Long-Term Bonds
67. The board of directors of the Costmore Corporation authorized the issuance of $1,200,000 face value of 5-year, 8 percent bonds dated March 1, 2013, and maturing on March 1, 2015. Interest is payable semiannually on September 1 and March 1. Record the following bond transactions on page 6 of a general journal. Omit descriptions.
22-49
Chapter 22 - Long-Term Bonds
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-03 Record the issuance of bonds. Learning Objective: 22-04 Record the payment of interest on bonds. Learning Objective: 22-05 Record the accrual of interest on bonds. Level: Medium Topic: Bond Issue and Interest
22-50
Chapter 22 - Long-Term Bonds
68. On September 1, 2014, a corporation paid $612,000 to retire bonds with a face value of $600,000 and an unamortized bond discount of $20,000. Record the transaction on page 8 of a general journal. Omit the description.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-10 Record retirement of bonds payable. Level: Medium Topic: Bond Retirement
69. On September 1, 2014, a corporation paid $620,000 to retire bonds with a face value of $600,000 and an unamortized bond premium of $10,000. Record the transaction on page 8 of a general journal. Omit the description.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-10 Record retirement of bonds payable. Level: Medium Topic: Bond Retirement
22-51
Chapter 22 - Long-Term Bonds
70. The board of directors of the Columbus Corporation authorized the issuance of $400,000 face value of 10-year, 12 percent bonds dated April 1, 2013, and maturing on April 1, 2023. Interest is payable semiannually on April 1 and October 1. Each bond has a face value of $1,000. Because the funds to be raised were not immediately needed, no bonds were issued until 2015. Record the following transactions on page 8 of a general journal. Omit descriptions.
22-52
Chapter 22 - Long-Term Bonds
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-03 Record the issuance of bonds. Learning Objective: 22-04 Record the payment of interest on bonds. Learning Objective: 22-05 Record the accrual of interest on bonds. Learning Objective: 22-06 Compute and record the periodic amortization of a bond premium. Level: Medium Topic: Bond Issue and Interest
71. The board of directors of the Merced Corporation authorized the issuance of $200,000 face value of 10-year, 12 percent bonds dated April 1, 2013, and maturing on April 1, 2023. Interest is payable semiannually on April 1 and October 1. Each bond has a face value of $1,000. Because the funds to be raised were not immediately needed, no bonds were issued until 2015. Record the following transactions on page 9 of a general journal. Omit descriptions.
22-53
Chapter 22 - Long-Term Bonds
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-03 Record the issuance of bonds. Learning Objective: 22-04 Record the payment of interest on bonds. Learning Objective: 22-05 Record the accrual of interest on bonds. Learning Objective: 22-07 Compute and record the periodic amortization of a bond discount. Level: Medium Topic: Bond Issue and Interest Topic: Bond Retirement
72. The Mammoth Corporation issued $800,000 face value of 10-year, 12 percent bonds dated April 1, 2013, and maturing on April 1, 2023. Interest is payable semiannually on April 1 and October 1. The bonds were issued at a price of 98. Record the transactions to issue the bonds on April 1, 2013, and to pay interest and amortize the bond discount on October 1, on page 9 of a general journal. Omit descriptions.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-07 Compute and record the periodic amortization of a bond discount. Level: Medium Topic: Bond Retirement
22-54
Chapter 22 - Long-Term Bonds
73. The Crowley Corporation issued $600,000 face value of 10-year, 8 percent bonds dated April 1, 2013, and maturing on April 1, 2023. Interest is payable semiannually on April 1 and October 1. The bonds were issued at a price of 103. Record the transactions to issue the bonds on April 1, 2013, and to pay interest and amortize the bond discount on October 1, on page 9 of a general journal. Omit descriptions.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-06 Compute and record the periodic amortization of a bond premium. Level: Medium Topic: Bond Retirement
22-55
Chapter 22 - Long-Term Bonds
74. The Morris Corporation has outstanding $300,000 face value of 12 percent bonds payable dated January 1, 2013, and maturing 10 years later on January 1, 2023. The corporation is required under the bond contract to transfer $30,000 each year to a bond sinking fund investment. The cash in the sinking fund investment is invested to earn interest. Record the following entries on page 6 of a general journal. Omit descriptions.
22-56
Chapter 22 - Long-Term Bonds
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-08 Record the transactions of a bond sinking fund investment. Learning Objective: 22-10 Record retirement of bonds payable. Level: Medium Topic: Bond Retirement
75. Bonds payable and mortgage loans are both long-term debt instruments. (a) How do bonds payable differ from notes payable? (b) Define bonds payable. (Include in your definition several characteristics and types of bonds payable.) (a) Bonds payable and notes payable are both written promises to repay the principal at a future date. However the bonds payable contract is more formal and can more easily be transferred from one owner to another than notes payable. (b) Bonds payable are sold to investors with the promise to repay the face value (or principal) at a specific date(s). Interest on the bonds is paid at a stated rate at specific times. Bonds can be secured or unsecured, registered or unregistered (coupon), single-maturity or serialmaturity, callable, or convertible.
AACSB: Analytic AICPA FN: Reporting Bloom's: Analyze Learning Objective: 22-01 Name and define the various types of bonds. Level: Medium Topic: Financing Through Bonds
22-57
Chapter 22 - Long-Term Bonds
76. Using the following format, compare capital stock and bonds as means of financing. List characteristics and differences.
AACSB: Analytic AICPA FN: Reporting Bloom's: Analyze Learning Objective: 22-02 Explain the advantages and disadvantages of using bonds as a method of financing. Level: Medium Topic: Financing Through Bonds
77. The adjusting entry for Barstow Corporation on September 30, 2013 (the end of the fiscal year) to accrue three months of bond interest due is as follows. Interest is paid on June 30 and December 31.
Make the entry to reverse this accrual. Include the proper date for the entry.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-05 Record the accrual of interest on bonds. Level: Medium Topic: Bond Issue and Interest
22-58
Chapter 22 - Long-Term Bonds
78. Lee Corporation has 10-year, 12% bonds payable of $100,000 that were sold on January 2, 2013 at a premium of $15,000. The amortization on the premium is recorded at the end of every year. Determine the Balance Sheet presentation of these bonds at December 31, 2015. (Present only the section of the Balance Sheet in which the bonds appear.)
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-06 Compute and record the periodic amortization of a bond premium. Level: Medium Topic: Bond Issue and Interest
79. Morris Corporation has 10-year, 12% bonds Payable of $100,000 that were sold on January 2, 2013 at a discount of $15,000. Amortization on the discount is recorded at the end of each year. Determine the Balance Sheet presentation of these bonds at December 31, 2014. (Present only the section of the Balance Sheet in which the bonds appear.)
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-07 Compute and record the periodic amortization of a bond discount. Level: Medium Topic: Bond Issue and Interest
22-59
Chapter 22 - Long-Term Bonds
80. When bonds are sold by a company, the company assumes debt. The principal of which is the amount of the face value of the bonds sold. Cash to pay this debt must be available when the bonds become due. Discuss things a company can do in order to have the funds available to pay the bond debt on the due date. Bond Sinking Fund A corporation can establish a bond sinking fund for the purpose of accumulating cash to pay off the debt. A sinking fund is an investment account. A cash amount is deposited and immediately invested. The amount of the yearly addition is determined by dividing the number of years to the due date into the amount of the liability. (i.e., If the Bonds Payable amount is $500,000 due in 10 years, a total of $50,000 must be added to the sinking fund at its inception and each year thereafter.) The cash added at the beginning of each year is the calculated amount less that year's earnings. On the bonds payable due date, the reserved funds are paid to the bondholder and the bonds are retired. Appropriated Retained Earnings Another means is for the company to appropriate Retained Earning for a set amount yearly so that in the year the debt is due, that total amount has been appropriated.
AACSB: Analytic AICPA FN: Reporting Bloom's: Analyze Learning Objective: 22-08 Record the transactions of a bond sinking fund investment. Learning Objective: 22-09 Record an increase or decrease in retained earnings appropriated for bond retirement. Learning Objective: 22-11 Define the accounting terms new to this chapter. Level: Medium Topic: Bond Retirement
81. What are the four things that must be done to remove the bonds from the books in an early retirement? (This is the second step. Step one is to amortize the discount or premium on the bonds up to the date of retirement.) First, the company must remove the book value of the bonds from the books. Second, interest up to the date of retirement is recorded. Third, the cash payment for the repurchase price and interest is recorded. Last, the gain or loss on the transaction is recorded.
AACSB: Analytic AICPA FN: Reporting Bloom's: Analyze Learning Objective: 22-10 Record retirement of bonds payable. Level: Medium Topic: Bond Retirement
22-60
Chapter 22 - Long-Term Bonds
82. What is the early retirement of bonds? There are two ways that the early retirement of bonds can come about. What are they? Retirement of bonds occurs at the maturity date of the bonds. However, if bonds are retired (paid for by the issuing company) early, they are retired prior to the maturity or due date. One way is for the company to purchase the bonds on the open market. A second way is to call the bonds. If the bonds are callable, the company can require the holders to surrender their bonds under the terms of the bond contract.
AACSB: Analytic AICPA FN: Reporting Bloom's: Analyze Learning Objective: 22-10 Record retirement of bonds payable. Learning Objective: 22-11 Define the accounting terms new to this chapter. Level: Medium Topic: Bond Retirement
83. Compare convertible and callable bonds by listing their characteristics in the following format.
AACSB: Analytic AICPA FN: Reporting Bloom's: Analyze Learning Objective: 22-01 Name and define the various types of bonds. Learning Objective: 22-11 Define the accounting terms new to this chapter. Level: Medium Topic: Bond Retirement Topic: Financing Through Bonds
22-61
Chapter 22 - Long-Term Bonds
84. Trog Industries pays and records the semiannual interest on its $500,000, 10-year, 6% bonds outstanding on July 1, 2013. On the same date, amortization of the premium of $5,000 received on $100,000 of those bonds. Prepare the journal entries recorded by Trog Industries.
AACSB: Analytic AICPA FN: Reporting Bloom's: Analyze Bloom's: Synthesis Learning Objective: 22-06 Compute and record the periodic amortization of a bond premium. Level: Medium Topic: Bond Issue and Interest
22-62
Chapter 22 - Long-Term Bonds
85. Galoot Corporation pays and records the semiannual interest on its $500,000, 10-year, 6% bonds outstanding on July 1, 2013. On the same date, amortization of the discount of $10,000 received on $200,000 of those bonds. Prepare the journal entries recorded by Galoot Corporation.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-07 Compute and record the periodic amortization of a bond discount. Level: Medium Topic: Bond Issue and Interest
22-63
Chapter 22 - Long-Term Bonds
86. Twee Corporation creates a bond sinking fund on July 1, 2013, the first day of its fiscal year in preparation of payment of principal of $300,000 due in six years. Twee makes a $50,000 cash deposit into the account and invests it in an oil stock fund. During the year, $4,400 is earned on this investment. Fund administrative expenses for this fund amount to $50. Record the journal entry for the creation of this fund, the earnings on the investment, and for the required amount of investment into the sinking fund at the beginning of the second year.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-08 Record the transactions of a bond sinking fund investment. Level: Medium Topic: Bond Retirement
22-64
Chapter 22 - Long-Term Bonds
87. Dweeb Industries decided to appropriate $40,000 of retained earnings during each of the last five years its $200,000 bonds are outstanding. Prepare the journal entry to record the initial appropriation and at retirement of the bonds on October 1, 2015.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-09 Record an increase or decrease in retained earnings appropriated for bond retirement. Level: Medium Topic: Bond Retirement
22-65
Chapter 22 - Long-Term Bonds
88. On April 1, 2015, Flummery Corporation purchased on the open market $100,000 of its 10-year 7% (interest paid semiannually) bonds and retired them. They are purchased at $102,000. These bonds were originally sold at their $100,000 face value on January 2, 2013. Prepare the journal entries necessary for this transaction.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 22-10 Record retirement of bonds payable. Level: Medium Topic: Bond Retirement
Matching Questions
22-66
Chapter 22 - Long-Term Bonds
89. Match the following definitions with the proper terms. 1. A bond contract 2. Cost incurred in issuing bonds (i.e., legal and accounting fees, printing costs) 3. The removal of the bond liability from the company's books when paid 4. Bearer bonds 5. Bonds that give the bondholder the right to exchange their bonds for common stock under specified conditions 6. The book value of bonds (principal plus premium or principal less discount) 7. A fund established for the purpose of putting cash in to pay off bonds when due 8. Bonds secured by the pledge of securities (i.e., stocks, bonds of another company) 9. Long-term debt instruments 10. Bonds that allow the issuing corporation to retire the bonds prior to their maturity date AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-11 Define the accounting terms new to this chapter. Level: Easy Topic: Bond Retirement
22-67
Bonds payable. 9 Callable bonds. 10 Bond sinking fund investment. 7 Carrying value of bonds. 6
Bond retirement. 3 Collateral trust bonds. 8 Bond issue costs. 2 Convertible bonds. 5 Bond indenture. 1 Coupon bonds. 4
Chapter 22 - Long-Term Bonds
90. Match the following definitions with the proper terms. 1. The excess of the face value over the price received by a company for bonds 2. The excess of the price paid over the face value of a bond 3. The amount the company must pay for the bond when it is called 4. Bonds issued at one time but payable over a period of time 5. The interest rate a corporation is willing to pay and investors will accept 6. Using borrowed funds to earn a profit greater than the interest paid on borrowing 7. The contractual interest specified on the bond 8. Bonds issued to a party whose name is listed in the corporation's records 9. Unsecured bonds backed only by a corporation's general credit 10. Bonds for which property is pledged to secure the bondholders' claims AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 22-11 Define the accounting terms new to this chapter. Level: Easy Topic: Bond Retirement
22-68
debentures 9 call price 3 serial bonds 4 discount on bonds payable 1 secured bonds 10 face interest rate 7 registered bonds 8 leveraging 6 premium on bonds payable 2 market interest rate 5
Chapter 23 - Financial Statement Analysis
Chapter 23 Financial Statement Analysis True / False Questions
1. In horizontal analysis, the base year is the most recent year. True False
2. Since each firm is a unique entity, comparison of data for the firm with industry averages is of no use in financial analysis. True False
3. When horizontal analysis is performed, no percentage change is computed for a given item if there is no balance for that item in the base year. True False
4. In vertical analysis, it is customary to express each item on the balance sheet as a percentage of total liabilities. True False
5. Comparison of amounts and percentages for only two years is adequate to indicate longterm trends. True False
6. Most trade associations provide common-size statements based on data gathered from member companies. True False
23-1
Chapter 23 - Financial Statement Analysis
7. A decrease in cost of goods sold from 46.5% to 45.0% from 2012 to 2013 indicates a favorable long-term trend. True False
8. On a comparative balance sheet that shows horizontal analysis, the percentage of change in total assets must equal the percentage of change in total liabilities and stockholders' equity. True False
9. The current ratio is a measure of profitability. True False
10. Quick assets include cash, receivables, and inventories. True False
11. The fair market value of a share of common stock is determined by dividing the stockholders' equity by the number of shares of common stock outstanding. True False
12. The rate of return on total assets measures how effectively management has used the assets of the company. True False
13. A high ratio of stockholders' equity to total liabilities indicates a greater risk for creditors. True False
14. The ability of a company to pay its debts when due is known as liquidity. True False
23-2
Chapter 23 - Financial Statement Analysis
15. The price-earnings ratio compares the present market value of a corporation's common stock with the earnings per share of that stock. True False
Fill in the Blank Questions
16. A company reported an expense of $30,000 for the current year that was $6,000 higher than the previous year. The increase from last year to this year was ____________________ percent. ________________________________________
17. A firm had current liabilities of $60,000 on December 31, 2012, and $51,000 on December 31, 2013. Current liabilities decreased by ____________________ percent. ________________________________________
18. A company reported net income of $80,000 for 2012, and net income of $100,000 for 2013. Net income increased by ____________________ percent. ________________________________________
19. A comparison of data for the current period with the same data of the company for previous periods is called ____________________ analysis. ________________________________________
20. In horizontal analysis, the earlier period is called the ____________________ period. ________________________________________
21. A vertical analysis of the income statement usually involves a comparison of each income statement item with ____________________ as reported on that income statement. ________________________________________
23-3
Chapter 23 - Financial Statement Analysis
22. If the cost of goods sold is 65 percent of net sales, then gross profit on sales must be ____________________ percent of net sales. ________________________________________
23. If the gross profit on sales is 20 percent of net sales, then cost of goods sold must be ____________________ percent of net sales. ________________________________________
24. A firm reported total liabilities of $60,000 and total stockholders' equity of $140,000. The amount of total liabilities is ____________________ percent of total assets. ________________________________________
25. Financial statements presented side-by-side for two or more periods are called ____________________ statements. ________________________________________
26. Percentages of a base amount rather than dollar amounts are given for the items on ____________________ statements. ________________________________________
27. The comparison of dollar amounts or percentages over several periods is called ____________________ analysis. ________________________________________
28. The yield on common stock is computed by dividing the dividend per share of common stock by the current ____________________ price of the share. ________________________________________
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Chapter 23 - Financial Statement Analysis
29. The rate of ____________________ on total assets measures the earnings on the assets used by a company. ________________________________________
30. The current ratio is a measure of _____________________; that is, the ability of a company to pay its currently maturing debts. ________________________________________
31. The ____________________ is calculated by dividing current assets by current liabilities. ________________________________________
32. A company reported net income of $80,000. It paid a cash dividend of $20,000 to preferred stockholders. If the company has 20,000 shares of common stock outstanding, earnings per share would be ______________. ________________________________________
33. A company reported net income of $120,000. It paid a cash dividend of $20,000 to preferred stockholders and a cash dividend to common shareholders of $40,000. If the company has 20,000 shares of common stock outstanding, earnings per share would be ______________. ________________________________________
34. The rate of return on net sales is a basic measure of operating efficiency and ___________________. ________________________________________
35. The price-earnings ratio is computed by dividing the current market value per share by the ____________________ per share. ________________________________________
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Chapter 23 - Financial Statement Analysis
36. The excess of current assets over current liabilities is known as ___________________. ________________________________________
37. The acid-test ratio is computed by dividing ____________________ assets by current liabilities. ________________________________________
38. Cost of goods sold divided by average inventory equals ___________________. ________________________________________
Multiple Choice Questions
39. If current assets are $90,000 and total assets are $270,000, what percentage of total assets are current assets? A. 3.5 percent B. 30 percent C. 25 percent D. 33 percent
40. If current liabilities are $90,000, long-term liabilities are $270,000, and total assets are $600,000, what is the percentage of total liabilities to total assets? A. 15 percent B. 45 percent C. 60 percent D. 100 percent
41. Trend analysis looks at A. selected ratios over a period of time. B. two years of information for comparison. C. two or more companies for comparison. D. profitability by industry.
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Chapter 23 - Financial Statement Analysis
42. A firm has liabilities of $60,000 and stockholders' equity of $180,000. The percentage of total liabilities to total assets is A. 25 percent. B. 20 percent. C. 50 percent. D. 75 percent.
43. A firm has current liabilities of $60,000, stockholders' equity of $180,000 and total assets of $300,000. The percentage of total liabilities to total assets is A. 20 percent. B. 40 percent. C. 60 percent. D. 80 percent.
44. Comparing the amount of a balance sheet item in one year to the amount for the same item in a prior year is called A. common-size analysis. B. vertical analysis. C. horizontal analysis. D. trend analysis.
45. In a vertical analysis of data, the cost of goods sold most likely would be expressed as a percentage of A. net sales. B. net income. C. gross profit on sales. D. total expenses.
46. A horizontal analysis of balance sheet data involves a comparison of a balance sheet amount on a given date with A. the total of the assets on the balance sheet for that date. B. the net sales from the income statement for the period ending on that date. C. the total stockholders' equity on the balance sheet for that date. D. the amount for the same balance sheet item on a previous date.
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Chapter 23 - Financial Statement Analysis
47. Vertical analysis of income statement data most often involves a comparison of each income statement item with A. net sales. B. gross profit on sales. C. net income before taxes. D. net income after taxes.
48. A firm had retained earnings of $100,000 in 2012 and $125,000 in 2013. The increase in retained earnings from 2012 to 2013 is A. 12.5 percent. B. 20 percent. C. 25 percent. D. 125 percent.
49. A company had income of $180,000 in 2012 and $240,000 in 2013. The increase in retained earnings from 2012 to 2013 is A. 133 percent. B. 33 percent. C. 25 percent. D. 125 percent.
50. If long-term liabilities are $75,000 and total assets are $525,000, what percentage of total assets are long-term liabilities? A. 7 percent B. 16.7 percent C. 12.5 percent D. 14.3 percent
51. If the comparative balance sheet shows the amount and percentage of decrease in merchandise inventory from 2012 to 2013, the firm used A. vertical analysis. B. horizontal analysis. C. common-size analysis. D. trend analysis.
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Chapter 23 - Financial Statement Analysis
52. In vertical analysis of the balance sheet, each item is expressed as a percentage of A. current liabilities. B. current assets. C. long-term liabilities. D. total assets or of total liabilities and stockholders' equity.
53. Which of the following is true of horizontal analysis? A. The percentages of change can be added or subtracted from top to bottom. B. The current year is always the base year. C. The amounts of increase or decrease can be added or subtracted in the column from top to bottom and will give correct subtotals at each point. D. The amounts and percentages of increase or decrease can be added and subtracted vertically in a column.
54. Which of the following is not true of vertical analysis? A. Each item on the balance sheet is expressed as a percentage of total liabilities. B. The percentages can be added and subtracted from top to bottom. C. Each item in the income statement is expressed as a percentage of net sales. D. Each item on the balance sheet is expressed as a percentage of total assets.
55. If total merchandise available for sale is 72 percent of net sales and cost of goods sold is 64 percent of net sales, gross profit on sales is A. 8 percent of net sales. B. 36 percent of net sales. C. 28 percent of net sales. D. 20 percent of net sales.
56. If the ratio of total stockholders' equity to total assets was greater in 2013 than in 2012, then A. total assets increased by a greater amount than did total stockholders' equity. B. the ratio of total liabilities to total assets was smaller in 2013 than in 2012. C. creditors would consider it riskier to lend to this company in 2013 than in 2012. D. the ratio of total liabilities to total assets was larger in 2013 than in 2012.
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Chapter 23 - Financial Statement Analysis
57. A company has total assets of $120,000, current assets of $80,000, total liabilities of $50,000, and current liabilities of $25,000. What is the current ratio? A. 4.80 to 1 B. 3.20 to 1 C. 2.40 to 1 D. 1.60 to 1
58. A company's January 1 balance in Merchandise Inventory is $40,000. The December 31 balance is $35,000. Cost of goods sold is $220,000. The company's inventory turnover is A. 17.05 to 1. B. 6.29 to 1. C. 5.87 to 1. D. 18.18 to 1.
59. Modern Products, Inc. had accounts receivable of $240,000 in 2012, and $300,000 in 2013. Net sales for 2013 was $3,000,000, and gross profit margin was $1,200,000. The accounts receivable turnover for 2013 was: A. 12.5 times. B. 11.1 times. C. 10 times. D. 5 times.
60. Which of the following is most likely to indicate that a firm is experiencing difficulty in collecting its receivables? A. Its accounts receivable turnover decreases from 10 to 8. B. Its accounts receivable turnover increases from 8 to 10. C. Its average collection period decreases from 36 to 32. D. Its average collection period increases from 25 to 28.
61. What is a ratio that measures financial strength? A. ratio of stockholders' equity to total liabilities B. current ratio C. working capital D. rate of return on sales
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Chapter 23 - Financial Statement Analysis
62. Low inventory turnover compared with the industry average might reflect A. obsolete goods. B. poor purchasing procedures. C. excess merchandise. D. all of the above.
Short Answer Questions
63. Using the comparative income statement given below, prepare a vertical analysis of all items. Carry all calculations to two decimal places and then round to one decimal place. (Leave all vertical analysis percentages unadjusted in this problem.)
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Chapter 23 - Financial Statement Analysis
64. Using the comparative income statement given below, prepare a horizontal analysis of all items. Carry all calculations to two decimal places and then round to one decimal place.
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Chapter 23 - Financial Statement Analysis
65. Using the comparative balance sheet given below, prepare a vertical analysis of all asset items. Carry all calculations to two decimal places and then round to one decimal place. (Leave all vertical analysis percentages unadjusted.)
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Chapter 23 - Financial Statement Analysis
66. Using the comparative balance sheet given below, prepare a horizontal analysis of all asset items. Carry all calculations to two decimal places and then round to one decimal place.
67. Differentiate between horizontal analysis and trend analysis. What does each reveal about the company being analyzed?
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Chapter 23 - Financial Statement Analysis
68. Using the information shown, prepare a horizontal analysis. Carry all calculations to two decimal places and then round to one decimal place.
69. Using the information shown, prepare a vertical analysis. Carry all calculations to two decimal places and then round to one decimal place.
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Chapter 23 - Financial Statement Analysis
70. Using the information shown, prepare a horizontal analysis. Carry all calculations to two decimal places and then round to one decimal place.
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Chapter 23 - Financial Statement Analysis
71. Using the information shown, prepare a vertical analysis. Carry all calculations to two decimal places and then round to one decimal place. (Leave all percentages unadjusted.)
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Chapter 23 - Financial Statement Analysis
72. Using the information shown, prepare a vertical analysis of all asset items. Carry all calculations to two decimal places and then round to one decimal place. (Leave all percentages unadjusted.)
73. Using the comparative balance sheet assets given below, prepare a horizontal analysis of all asset items. Carry all calculations to two decimal places and then round to one decimal place.
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Chapter 23 - Financial Statement Analysis
74. Using the information shown, prepare a vertical analysis of all asset items. Carry all calculations to two decimal places and then round to one decimal place. (Leave all percentages unadjusted.)
75. Using the comparative balance sheet assets given below, prepare a horizontal analysis of all asset items. Carry all calculations to two decimal places and then round to one decimal place.
76. Using the information given below, calculate the gross profit percentage based on net sales. What conclusions can be made about this company based on this trend analysis?
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Chapter 23 - Financial Statement Analysis
77. Using the information given below, calculate the gross profit percentage based on net sales. What conclusions can be made about this company based on this trend analysis?
78. Using the information given, discuss Lee Corporation's outcomes compared to J & S Partnership.
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Chapter 23 - Financial Statement Analysis
79. Using the information given, discuss Lee Corporation's standing when compared to the industry averages.
80. Using the information given, discuss J & S Partnership's outcomes compared to the industry averages.
81. The following financial information was taken from a firm's accounting records on December 31, 2013. Use this information to determine the items below.
(1) Rate of return on net sales. (2) Rate of return on total assets. (3) Asset turnover.
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Chapter 23 - Financial Statement Analysis
82. The following financial information was taken from a Unit Sales Inc.'s accounting records on December 31, 2013. Use this information to determine the items below.
(1) Rate of return on net sales. (2) Rate of return on total assets. (3) Asset turnover.
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Chapter 23 - Financial Statement Analysis
83. The following financial information was taken from a firm's accounting records on December 31, 2013. Use this information to determine the items below.
Cash dividends of $22,000 were paid on the common stock in 2013. Market price of the common stock on December 31 was $50. (1) Rate of return on common stockholders' equity. (2) Earnings per share of common stock. (3) Price-earnings ratio. (4) Yield on common stock.
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Chapter 23 - Financial Statement Analysis
84. The following financial information was taken from a firm's accounting records on December 31, 2013. Use this information to determine the items below.
Market price of the common stock on December 31 was $50. (1) Ratio of stockholders' equity to total equities. (2) Ratio of stockholders' equity to total liabilities. (3) Book value per share of common stock.
85. The following financial information was taken from a firm's accounting records on December 31, 2013. Use this information to determine the items below.
(1) Working capital. (2) Current ratio. (3) Acid-test ratio
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Chapter 23 - Financial Statement Analysis
86. The following financial information was taken from a firm's accounting records on December 31, 2013. Use this information to determine the items below.
(1) Working capital. (2) Current ratio. (3) Acid-test ratio. (4) Ratio of stockholders' equity to total liabilities.
87. The following financial information was taken from a firm's accounting records for 2013. Use this information to determine the items below.
(1) Inventory turnover. (2) Accounts receivable turnover. (3) Average collection period of accounts receivable.
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Chapter 23 - Financial Statement Analysis
88. The following financial information was taken from a firm's accounting records for 2013. Use this information to determine the items below.
(1) Inventory turnover. (2) Accounts receivable turnover. (3) Average collection period of accounts receivable.
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Chapter 23 - Financial Statement Analysis
89. Selected financial ratios are given for Canard Industries and Canaille Manufacturing. Both firms have come to your bank and requested loans. You are a loan officer at Noir Bank but can only loan funds to one of the firms. Make your decision based on the information provided. In a short paragraph, explain the basis for the selection you made.
90. You are a loan officer with Scotia Bank. Select at least two of the ratios listed as most useful to you for a decision regarding providing loan proceeds to DC, Inc. and AR, Inc. companies? What additional ratios would you request? Why? Ratios: Working Capital Current Ratio Acid Test Ratio Inventory Turnover Accounts Receivable Turnover
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Chapter 23 - Financial Statement Analysis
91. What is the PE ratio? How is it calculated and why is it that the PE ratio for a privately held company often cannot be calculated?
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Chapter 23 - Financial Statement Analysis
23-29
Chapter 23 - Financial Statement Analysis
23-30
Chapter 23 - Financial Statement Analysis
92. Using the information given, analyze the profitability ratios of Sybaritic Corporation for 2013.
93. Using the information given, analyze the financial strength of Sybaritic Corporation for 2013.
94. Using the information given, analyze the liquidity of Sybaritic Corporation for the year 2013.
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Chapter 23 - Financial Statement Analysis
23-32
Chapter 23 - Financial Statement Analysis
23-33
Chapter 23 - Financial Statement Analysis
95. Using the information given, analyze the profitability ratios of Quotidian Industries for 2013.
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Chapter 23 - Financial Statement Analysis
96. Using the information given, analyze the financial strength of Quotidian Industries for 2013.
97. Using the information given, analyze the liquidity of Quotidian Industries for 2013.
98. Selected ratios for Julienne Foods, Inc. and Brut Champagnes, Inc. are given. What do these ratios tell you about the companies regarding whether or not to invest in either of them and what additional information might be helpful in that decision?
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Chapter 23 - Financial Statement Analysis
99. Selected financial ratios for Riparian Products and Escarpment Equipment are given. Assess the ratios given for each company and explain which company the ratios suggest is the stronger of the two.
100. Selected financial ratios for Opus Company and its industry averages are given. What does the information suggest about Opus?
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Chapter 23 - Financial Statement Analysis
Chapter 23 Financial Statement Analysis Answer Key
True / False Questions
1. In horizontal analysis, the base year is the most recent year. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Easy Topic: Horizontal Analysis
2. Since each firm is a unique entity, comparison of data for the firm with industry averages is of no use in financial analysis. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 23-04 Interpret the results of the statement analyses by comparison with industry averages. Level: Easy Topic: Horizontal Analysis
3. When horizontal analysis is performed, no percentage change is computed for a given item if there is no balance for that item in the base year. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Easy Topic: Horizontal Analysis
23-37
Chapter 23 - Financial Statement Analysis
4. In vertical analysis, it is customary to express each item on the balance sheet as a percentage of total liabilities. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Easy Topic: Vertical Analysis
5. Comparison of amounts and percentages for only two years is adequate to indicate longterm trends. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 23-03 Use trend analysis to evaluate financial statements. Level: Easy Topic: Horizontal Analysis
6. Most trade associations provide common-size statements based on data gathered from member companies. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 23-04 Interpret the results of the statement analyses by comparison with industry averages. Level: Easy Topic: Horizontal Analysis
7. A decrease in cost of goods sold from 46.5% to 45.0% from 2012 to 2013 indicates a favorable long-term trend. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 23-03 Use trend analysis to evaluate financial statements. Level: Easy Topic: Horizontal Analysis
23-38
Chapter 23 - Financial Statement Analysis
8. On a comparative balance sheet that shows horizontal analysis, the percentage of change in total assets must equal the percentage of change in total liabilities and stockholders' equity. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Easy Topic: Horizontal Analysis
9. The current ratio is a measure of profitability. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Easy Topic: Ratios
10. Quick assets include cash, receivables, and inventories. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Easy Topic: Ratios
11. The fair market value of a share of common stock is determined by dividing the stockholders' equity by the number of shares of common stock outstanding. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Level: Easy Topic: Ratios
23-39
Chapter 23 - Financial Statement Analysis
12. The rate of return on total assets measures how effectively management has used the assets of the company. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Level: Easy Topic: Ratios
13. A high ratio of stockholders' equity to total liabilities indicates a greater risk for creditors. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 23-06 Compute and interpret financial ratios that measure financial strength. Level: Easy Topic: Ratios
14. The ability of a company to pay its debts when due is known as liquidity. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Easy Topic: Ratios
15. The price-earnings ratio compares the present market value of a corporation's common stock with the earnings per share of that stock. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Level: Easy Topic: Ratios
23-40
Chapter 23 - Financial Statement Analysis
Fill in the Blank Questions
16. A company reported an expense of $30,000 for the current year that was $6,000 higher than the previous year. The increase from last year to this year was ____________________ percent. 20
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Horizontal Analysis
17. A firm had current liabilities of $60,000 on December 31, 2012, and $51,000 on December 31, 2013. Current liabilities decreased by ____________________ percent. 15
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Horizontal Analysis
18. A company reported net income of $80,000 for 2012, and net income of $100,000 for 2013. Net income increased by ____________________ percent. 25
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Horizontal Analysis
23-41
Chapter 23 - Financial Statement Analysis
19. A comparison of data for the current period with the same data of the company for previous periods is called ____________________ analysis. horizontal
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Easy Topic: Horizontal Analysis
20. In horizontal analysis, the earlier period is called the ____________________ period. base
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Easy Topic: Horizontal Analysis
21. A vertical analysis of the income statement usually involves a comparison of each income statement item with ____________________ as reported on that income statement. net sales
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Easy Topic: Vertical Analysis
22. If the cost of goods sold is 65 percent of net sales, then gross profit on sales must be ____________________ percent of net sales. 35
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
23-42
Chapter 23 - Financial Statement Analysis
23. If the gross profit on sales is 20 percent of net sales, then cost of goods sold must be ____________________ percent of net sales. 80
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
24. A firm reported total liabilities of $60,000 and total stockholders' equity of $140,000. The amount of total liabilities is ____________________ percent of total assets. 30
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
25. Financial statements presented side-by-side for two or more periods are called ____________________ statements. comparative
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Easy Topic: Horizontal Analysis Topic: Vertical Analysis
23-43
Chapter 23 - Financial Statement Analysis
26. Percentages of a base amount rather than dollar amounts are given for the items on ____________________ statements. common-size
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Easy Topic: Horizontal Analysis Topic: Vertical Analysis
27. The comparison of dollar amounts or percentages over several periods is called ____________________ analysis. trend
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 23-03 Use trend analysis to evaluate financial statements. Level: Easy Topic: Horizontal Analysis
28. The yield on common stock is computed by dividing the dividend per share of common stock by the current ____________________ price of the share. market
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Level: Easy Topic: Ratios
23-44
Chapter 23 - Financial Statement Analysis
29. The rate of ____________________ on total assets measures the earnings on the assets used by a company. return
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Level: Easy Topic: Ratios
30. The current ratio is a measure of _____________________; that is, the ability of a company to pay its currently maturing debts. liquidity
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Easy Topic: Ratios
31. The ____________________ is calculated by dividing current assets by current liabilities. current ratio
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Easy Topic: Ratios
23-45
Chapter 23 - Financial Statement Analysis
32. A company reported net income of $80,000. It paid a cash dividend of $20,000 to preferred stockholders. If the company has 20,000 shares of common stock outstanding, earnings per share would be ______________. $3
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Level: Medium Topic: Ratios
33. A company reported net income of $120,000. It paid a cash dividend of $20,000 to preferred stockholders and a cash dividend to common shareholders of $40,000. If the company has 20,000 shares of common stock outstanding, earnings per share would be ______________. $5
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Level: Medium Topic: Ratios
34. The rate of return on net sales is a basic measure of operating efficiency and ___________________. profitability
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Level: Easy Topic: Ratios
23-46
Chapter 23 - Financial Statement Analysis
35. The price-earnings ratio is computed by dividing the current market value per share by the ____________________ per share. earnings
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Level: Easy Topic: Ratios
36. The excess of current assets over current liabilities is known as ___________________. working capital
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Easy Topic: Ratios
37. The acid-test ratio is computed by dividing ____________________ assets by current liabilities. quick
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Easy Topic: Ratios
38. Cost of goods sold divided by average inventory equals ___________________. inventory turnover
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Easy Topic: Ratios
23-47
Chapter 23 - Financial Statement Analysis
Multiple Choice Questions
39. If current assets are $90,000 and total assets are $270,000, what percentage of total assets are current assets? A. 3.5 percent B. 30 percent C. 25 percent D. 33 percent
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
40. If current liabilities are $90,000, long-term liabilities are $270,000, and total assets are $600,000, what is the percentage of total liabilities to total assets? A. 15 percent B. 45 percent C. 60 percent D. 100 percent
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
41. Trend analysis looks at A. selected ratios over a period of time. B. two years of information for comparison. C. two or more companies for comparison. D. profitability by industry.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 23-03 Use trend analysis to evaluate financial statements. Level: Easy Topic: Horizontal Analysis
23-48
Chapter 23 - Financial Statement Analysis
42. A firm has liabilities of $60,000 and stockholders' equity of $180,000. The percentage of total liabilities to total assets is A. 25 percent. B. 20 percent. C. 50 percent. D. 75 percent.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
43. A firm has current liabilities of $60,000, stockholders' equity of $180,000 and total assets of $300,000. The percentage of total liabilities to total assets is A. 20 percent. B. 40 percent. C. 60 percent. D. 80 percent.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
44. Comparing the amount of a balance sheet item in one year to the amount for the same item in a prior year is called A. common-size analysis. B. vertical analysis. C. horizontal analysis. D. trend analysis.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Easy Topic: Horizontal Analysis
23-49
Chapter 23 - Financial Statement Analysis
45. In a vertical analysis of data, the cost of goods sold most likely would be expressed as a percentage of A. net sales. B. net income. C. gross profit on sales. D. total expenses.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Easy Topic: Vertical Analysis
46. A horizontal analysis of balance sheet data involves a comparison of a balance sheet amount on a given date with A. the total of the assets on the balance sheet for that date. B. the net sales from the income statement for the period ending on that date. C. the total stockholders' equity on the balance sheet for that date. D. the amount for the same balance sheet item on a previous date.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Easy Topic: Horizontal Analysis
47. Vertical analysis of income statement data most often involves a comparison of each income statement item with A. net sales. B. gross profit on sales. C. net income before taxes. D. net income after taxes.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Easy Topic: Vertical Analysis
23-50
Chapter 23 - Financial Statement Analysis
48. A firm had retained earnings of $100,000 in 2012 and $125,000 in 2013. The increase in retained earnings from 2012 to 2013 is A. 12.5 percent. B. 20 percent. C. 25 percent. D. 125 percent.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Horizontal Analysis
49. A company had income of $180,000 in 2012 and $240,000 in 2013. The increase in retained earnings from 2012 to 2013 is A. 133 percent. B. 33 percent. C. 25 percent. D. 125 percent.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Horizontal Analysis
50. If long-term liabilities are $75,000 and total assets are $525,000, what percentage of total assets are long-term liabilities? A. 7 percent B. 16.7 percent C. 12.5 percent D. 14.3 percent
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
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Chapter 23 - Financial Statement Analysis
51. If the comparative balance sheet shows the amount and percentage of decrease in merchandise inventory from 2012 to 2013, the firm used A. vertical analysis. B. horizontal analysis. C. common-size analysis. D. trend analysis.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Easy Topic: Horizontal Analysis
52. In vertical analysis of the balance sheet, each item is expressed as a percentage of A. current liabilities. B. current assets. C. long-term liabilities. D. total assets or of total liabilities and stockholders' equity.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Easy Topic: Vertical Analysis
53. Which of the following is true of horizontal analysis? A. The percentages of change can be added or subtracted from top to bottom. B. The current year is always the base year. C. The amounts of increase or decrease can be added or subtracted in the column from top to bottom and will give correct subtotals at each point. D. The amounts and percentages of increase or decrease can be added and subtracted vertically in a column.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Horizontal Analysis
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Chapter 23 - Financial Statement Analysis
54. Which of the following is not true of vertical analysis? A. Each item on the balance sheet is expressed as a percentage of total liabilities. B. The percentages can be added and subtracted from top to bottom. C. Each item in the income statement is expressed as a percentage of net sales. D. Each item on the balance sheet is expressed as a percentage of total assets.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
55. If total merchandise available for sale is 72 percent of net sales and cost of goods sold is 64 percent of net sales, gross profit on sales is A. 8 percent of net sales. B. 36 percent of net sales. C. 28 percent of net sales. D. 20 percent of net sales.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
56. If the ratio of total stockholders' equity to total assets was greater in 2013 than in 2012, then A. total assets increased by a greater amount than did total stockholders' equity. B. the ratio of total liabilities to total assets was smaller in 2013 than in 2012. C. creditors would consider it riskier to lend to this company in 2013 than in 2012. D. the ratio of total liabilities to total assets was larger in 2013 than in 2012.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-03 Use trend analysis to evaluate financial statements. Level: Medium Topic: Horizontal Analysis
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Chapter 23 - Financial Statement Analysis
57. A company has total assets of $120,000, current assets of $80,000, total liabilities of $50,000, and current liabilities of $25,000. What is the current ratio? A. 4.80 to 1 B. 3.20 to 1 C. 2.40 to 1 D. 1.60 to 1
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Medium Topic: Ratios
58. A company's January 1 balance in Merchandise Inventory is $40,000. The December 31 balance is $35,000. Cost of goods sold is $220,000. The company's inventory turnover is A. 17.05 to 1. B. 6.29 to 1. C. 5.87 to 1. D. 18.18 to 1.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Medium Topic: Ratios
59. Modern Products, Inc. had accounts receivable of $240,000 in 2012, and $300,000 in 2013. Net sales for 2013 was $3,000,000, and gross profit margin was $1,200,000. The accounts receivable turnover for 2013 was: A. 12.5 times. B. 11.1 times. C. 10 times. D. 5 times.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Horizontal Analysis
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Chapter 23 - Financial Statement Analysis
60. Which of the following is most likely to indicate that a firm is experiencing difficulty in collecting its receivables? A. Its accounts receivable turnover decreases from 10 to 8. B. Its accounts receivable turnover increases from 8 to 10. C. Its average collection period decreases from 36 to 32. D. Its average collection period increases from 25 to 28.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Easy Topic: Ratios
61. What is a ratio that measures financial strength? A. ratio of stockholders' equity to total liabilities B. current ratio C. working capital D. rate of return on sales
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 23-06 Compute and interpret financial ratios that measure financial strength. Level: Easy Topic: Ratios
62. Low inventory turnover compared with the industry average might reflect A. obsolete goods. B. poor purchasing procedures. C. excess merchandise. D. all of the above.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Easy Topic: Ratios
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Chapter 23 - Financial Statement Analysis
Short Answer Questions
63. Using the comparative income statement given below, prepare a vertical analysis of all items. Carry all calculations to two decimal places and then round to one decimal place. (Leave all vertical analysis percentages unadjusted in this problem.)
1) 100.0; 100.0; 2) 62.7; 66.9; 3) 37.3; 33.1; 4) 20.4; 16.4; 5) 16.8; 16.7; 6) 2.5; 2.4; 7) 14.3; 14.3
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
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Chapter 23 - Financial Statement Analysis
64. Using the comparative income statement given below, prepare a horizontal analysis of all items. Carry all calculations to two decimal places and then round to one decimal place.
1. $42,500; 13.2%; 2. $13,250; 6.1%; 3. $29,250; 27.4%; 4. $21,500; 40.6%; 5. $7,750; 14.4%; 6. $1,385; 17.9%; 7. $6,365; 13.8%
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Horizontal Analysis
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Chapter 23 - Financial Statement Analysis
65. Using the comparative balance sheet given below, prepare a vertical analysis of all asset items. Carry all calculations to two decimal places and then round to one decimal place. (Leave all vertical analysis percentages unadjusted.)
1. 13.5; 18.8; 2. 34.5; 30.4; 3. 35.5; 35.3; 4. 1.0; 0.7; 5. 18.3; 16.8; 6. (2.9); (2.0); 7. 100 0; 100.0.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
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Chapter 23 - Financial Statement Analysis
66. Using the comparative balance sheet given below, prepare a horizontal analysis of all asset items. Carry all calculations to two decimal places and then round to one decimal place.
1. ($24,000); (23.1%); 2. $36,000; 21.4%; 3. $15,000; 7.7%; 4. $2,000; 50.0%; 5. $15,000; 16.1%; 6. ($6,000); 54.5%; 7. $38,000; 6.9%
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Horizontal Analysis
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Chapter 23 - Financial Statement Analysis
67. Differentiate between horizontal analysis and trend analysis. What does each reveal about the company being analyzed? Answers may vary from student to student, but the basics should be touched on.
Both provide information to managers for decision-making. In horizontal analysis the size of the percent change in an account from the prior year is analyzed) In trend analysis, a ratio is chosen—gross profit percent for example—and looked at over a longer period (usually five years). Management may be concerned about a decrease from year 2 to year 3, but the overall trend is also noted) Small decreases from year to year may not have been alarming as they occurred, but if every year was a decrease, the cumulative effect can be viewed as a significant issue.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Learning Objective: 23-03 Use trend analysis to evaluate financial statements. Level: Medium Topic: Horizontal Analysis
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Chapter 23 - Financial Statement Analysis
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Chapter 23 - Financial Statement Analysis
68. Using the information shown, prepare a horizontal analysis. Carry all calculations to two decimal places and then round to one decimal place.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Horizontal Analysis
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Chapter 23 - Financial Statement Analysis
69. Using the information shown, prepare a vertical analysis. Carry all calculations to two decimal places and then round to one decimal place.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
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Chapter 23 - Financial Statement Analysis
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Chapter 23 - Financial Statement Analysis
70. Using the information shown, prepare a horizontal analysis. Carry all calculations to two decimal places and then round to one decimal place.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Horizontal Analysis
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Chapter 23 - Financial Statement Analysis
71. Using the information shown, prepare a vertical analysis. Carry all calculations to two decimal places and then round to one decimal place. (Leave all percentages unadjusted.)
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
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Chapter 23 - Financial Statement Analysis
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Chapter 23 - Financial Statement Analysis
72. Using the information shown, prepare a vertical analysis of all asset items. Carry all calculations to two decimal places and then round to one decimal place. (Leave all percentages unadjusted.)
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
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Chapter 23 - Financial Statement Analysis
73. Using the comparative balance sheet assets given below, prepare a horizontal analysis of all asset items. Carry all calculations to two decimal places and then round to one decimal place.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Horizontal Analysis
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Chapter 23 - Financial Statement Analysis
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Chapter 23 - Financial Statement Analysis
74. Using the information shown, prepare a vertical analysis of all asset items. Carry all calculations to two decimal places and then round to one decimal place. (Leave all percentages unadjusted.)
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-01 Use vertical analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Vertical Analysis
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Chapter 23 - Financial Statement Analysis
75. Using the comparative balance sheet assets given below, prepare a horizontal analysis of all asset items. Carry all calculations to two decimal places and then round to one decimal place.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 23-02 Use horizontal analysis techniques to analyze a comparative income statement and balance sheet. Level: Medium Topic: Horizontal Analysis
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Chapter 23 - Financial Statement Analysis
76. Using the information given below, calculate the gross profit percentage based on net sales. What conclusions can be made about this company based on this trend analysis?
Conclusions: Although sales are increasing steadily, gross profit is declining. In 2014, the gross profit increased over 2013, but is still below the 53% shown in 2013. Future years will tell whether or not the company has turned the decline in the gross profit percentage or whether it was only that year. If management took steps in 2014 to turn the downward trend in gross profit, then those actions worked. Only future years will confirm this.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 23-03 Use trend analysis to evaluate financial statements. Level: Medium Topic: Horizontal Analysis
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Chapter 23 - Financial Statement Analysis
77. Using the information given below, calculate the gross profit percentage based on net sales. What conclusions can be made about this company based on this trend analysis?
Management has been able to increase sales consistently over the five years. In addition, even though the gross profit percentage to sales was down slightly from 2013 in 2014 and 2015, the dollar figure was higher. In 2013, the gross profit percentage to sales was back up and increased in 2014. This indicates that management has been able to not only increase sales consistently, but has been able to keep cost of goods sold in line. If the upward trend in gross profit percentage to sales is continued, the company will grow in strength.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 23-03 Use trend analysis to evaluate financial statements. Level: Medium Topic: Horizontal Analysis
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Chapter 23 - Financial Statement Analysis
78. Using the information given, discuss Lee Corporation's outcomes compared to J & S Partnership. Lee Corporation has a higher cost of goods sold and a lower gross profit. This indicates that Lee Corporation may not be as proficient in controlling costs. It may also mean that Lee sells for a lower relative price or purchases at a relative higher cost. However, Lee's selling expenses and administrative expenses are lower than J & S's. In these areas they are doing a better job of controlling costs. Overall, Lee Corporation is not doing as well as J & S Partnership because their Income before Income Tax is only 4.2% compared to J & S Partnership's 6.1%. Lee's management should be concerned about this and look more closely at the numbers in order to be more competitive.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 23-04 Interpret the results of the statement analyses by comparison with industry averages. Level: Hard Topic: Horizontal Analysis
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Chapter 23 - Financial Statement Analysis
79. Using the information given, discuss Lee Corporation's standing when compared to the industry averages. Lee Corporation has a higher cost of goods sold and a lower gross profit than the industry average. However, because its selling expenses and administrative expenses are lower than the industry averages, Lee has a final net income that is higher than the industry average. Even though this bottom line number is strong, management should look into lowering the corporation's cost of goods sold.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 23-04 Interpret the results of the statement analyses by comparison with industry averages. Level: Hard Topic: Horizontal Analysis
80. Using the information given, discuss J & S Partnership's outcomes compared to the industry averages. J & S has a higher gross profit than the industry averages. This indicates that the company is strong and that it is handling its costs of merchandise well. It may also indicate that J & S can sell at a relative higher price. Its selling expenses are less than the industry averages while its administrative expenses are higher. The differences are small. J & S has an income before income taxes that is higher than the industry average. This is good, indicating that overall management is doing a good job. J & S management should keep an eye on administrative costs in the future and try to bring it down if possible, but curtailing its growth is a must.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 23-04 Interpret the results of the statement analyses by comparison with industry averages. Level: Hard Topic: Horizontal Analysis
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Chapter 23 - Financial Statement Analysis
81. The following financial information was taken from a firm's accounting records on December 31, 2013. Use this information to determine the items below.
(1) Rate of return on net sales. (2) Rate of return on total assets. (3) Asset turnover. 1. 5.3%; 2. 15.6%; 3. 2.5 to 1
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Level: Medium Topic: Ratios
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Chapter 23 - Financial Statement Analysis
82. The following financial information was taken from a Unit Sales Inc.'s accounting records on December 31, 2013. Use this information to determine the items below.
(1) Rate of return on net sales. (2) Rate of return on total assets. (3) Asset turnover. 1. 5.50%; 2. 8.25%; 3. 1.5 to 1.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Level: Medium Topic: Ratios
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Chapter 23 - Financial Statement Analysis
83. The following financial information was taken from a firm's accounting records on December 31, 2013. Use this information to determine the items below.
Cash dividends of $22,000 were paid on the common stock in 2013. Market price of the common stock on December 31 was $50. (1) Rate of return on common stockholders' equity. (2) Earnings per share of common stock. (3) Price-earnings ratio. (4) Yield on common stock. 1. 9.1%; 2. $5.00; 3. 10 to 1; 4. 5.5%
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Level: Medium Topic: Ratios
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Chapter 23 - Financial Statement Analysis
84. The following financial information was taken from a firm's accounting records on December 31, 2013. Use this information to determine the items below.
Market price of the common stock on December 31 was $50. (1) Ratio of stockholders' equity to total equities. (2) Ratio of stockholders' equity to total liabilities. (3) Book value per share of common stock. 1. 0.64 to 1; 2. 1.79 to 1; 3. $53.75
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 23-06 Compute and interpret financial ratios that measure financial strength. Level: Medium Topic: Ratios
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Chapter 23 - Financial Statement Analysis
85. The following financial information was taken from a firm's accounting records on December 31, 2013. Use this information to determine the items below.
(1) Working capital. (2) Current ratio. (3) Acid-test ratio 1. $390,000; 2. 4.25 to 1; 3. 1.67 to 1
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Medium Topic: Ratios
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Chapter 23 - Financial Statement Analysis
86. The following financial information was taken from a firm's accounting records on December 31, 2013. Use this information to determine the items below.
(1) Working capital. (2) Current ratio. (3) Acid-test ratio. (4) Ratio of stockholders' equity to total liabilities. 1. $340,000; 2. 3:83 to 1; 3. 1.63 to 1; 4. 0.84 to 1.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 23-06 Compute and interpret financial ratios that measure financial strength. Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Medium Topic: Ratios
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Chapter 23 - Financial Statement Analysis
87. The following financial information was taken from a firm's accounting records for 2013. Use this information to determine the items below.
(1) Inventory turnover. (2) Accounts receivable turnover. (3) Average collection period of accounts receivable. 1. 4.8 times; 2. 10.8 times; 3. 33.8 days
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Medium Topic: Ratios
88. The following financial information was taken from a firm's accounting records for 2013. Use this information to determine the items below.
(1) Inventory turnover. (2) Accounts receivable turnover. (3) Average collection period of accounts receivable. 1. 2.5 times; 2. 9.1 times; 3. 40.1 days
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Medium Topic: Ratios
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Chapter 23 - Financial Statement Analysis
89. Selected financial ratios are given for Canard Industries and Canaille Manufacturing. Both firms have come to your bank and requested loans. You are a loan officer at Noir Bank but can only loan funds to one of the firms. Make your decision based on the information provided. In a short paragraph, explain the basis for the selection you made.
Student answers will vary. They should touch on several of the items mentioned below. Selecting either company is permissible. It is their rationale that demonstrates the student's understanding of the ratios. They should mention that the Rate of Return on Net Sales is an indication of management efficiency and of profitability. The Return on Stockholders' Equity is a key measure of how well the corporation is making a profit for its shareholders. Canard Industries performs better than Canaille Manufacturing in both of these measures. The Current Ratio and the Accounts Receivable turnover ratios measure liquidity of a company. The Current Ratio indicates the company's ability to pay its current debts. The Accounts Receivable turnover ratio indicates the reasonableness of the accounts outstanding. Canaille Manufacturing performs better than Canard Industries regarding liquidity.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Hard Topic: Ratios
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Chapter 23 - Financial Statement Analysis
90. You are a loan officer with Scotia Bank. Select at least two of the ratios listed as most useful to you for a decision regarding providing loan proceeds to DC, Inc. and AR, Inc. companies? What additional ratios would you request? Why? Ratios: Working Capital Current Ratio Acid Test Ratio Inventory Turnover Accounts Receivable Turnover The ratios listed are all liquidity ratios. The student should mention at least one of the ratios that measure profitability, operating results, and efficiency, and those that measure financial strength. The students' reasoning should be logical and any information given about a ratio should be accurate.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Learning Objective: 23-06 Compute and interpret financial ratios that measure financial strength. Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Hard Topic: Ratios
91. What is the PE ratio? How is it calculated and why is it that the PE ratio for a privately held company often cannot be calculated? The PE ratio is the price-earnings ratio. It compares the market value of common stock with the earnings per share of that stock. The market value per share is divided by the earnings per share and indicates the amount investors are willing to pay for stock based on future expectations for it. In order to calculate the PE ratio, a market value for the shares must be readily available. For privately-held corporations, a market value is often not available.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Level: Easy Topic: Ratios
23-85
Chapter 23 - Financial Statement Analysis
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Chapter 23 - Financial Statement Analysis
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Chapter 23 - Financial Statement Analysis
92. Using the information given, analyze the profitability ratios of Sybaritic Corporation for 2013. Rate of Return on Net Sales = 30.24% Rate of Return on Common Stock Equity = 23.29% Earnings per share of common stock = 4.88 Price Earnings Ratio = 11.68 Yield on common stock = N/A No dividend reported declared or paid Rate of Return on Total Assets = 18.16% Asset Turnover = 48.15%
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 23-08 Recognize shortcomings in financial statement analysis. Level: Medium Topic: Ratios
93. Using the information given, analyze the financial strength of Sybaritic Corporation for 2013. Number of times bond interest earned = 15.22 Ratio of stockholders' equity to total equities = .798 Ratio of stockholders' equity to total liabilities = 3.958 Book value per share of common stock (N/A - no preferred stock)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 23-08 Recognize shortcomings in financial statement analysis. Level: Medium Topic: Ratios
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Chapter 23 - Financial Statement Analysis
94. Using the information given, analyze the liquidity of Sybaritic Corporation for the year 2013. Working capital = 438,000 Current ratio = 4.1739 Acid-test ratio = 2.2246 Inventory turnover = 1.9294 Accounts receivable turnover = 3.985 Average collection period = 91.59
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 23-08 Recognize shortcomings in financial statement analysis. Level: Medium Topic: Ratios
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Chapter 23 - Financial Statement Analysis
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Chapter 23 - Financial Statement Analysis
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Chapter 23 - Financial Statement Analysis
95. Using the information given, analyze the profitability ratios of Quotidian Industries for 2013. Rate of Return on Net Sales = 34.67% Rate of Return on Common Stock Equity = 40.20% Earnings per share of common stock = 16.85 Price Earnings Ratio = 5.697 Yield on common stock = N/A No dividend reported declared or paid Rate of Return on Total Assets = 22.8% Asset Turnover = 59.26
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 23-08 Recognize shortcomings in financial statement analysis. Level: Medium Topic: Ratios
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Chapter 23 - Financial Statement Analysis
96. Using the information given, analyze the financial strength of Quotidian Industries for 2013. Number of times bond interest earned = 31.2 Ratio of stockholders' equity to total equities = .828 Ratio of stockholders' equity to total liabilities = 4.815 Book value per share of common stock (N/A - no preferred stock)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 23-08 Recognize shortcomings in financial statement analysis. Level: Medium Topic: Ratios
97. Using the information given, analyze the liquidity of Quotidian Industries for 2013. Working capital = 1,395,000 Current ratio = 4.444 Acid-test ratio = 2.444 Inventory turnover = 2.1206 Accounts receivable turnover = 3.744 Average collection period = 97.489
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 23-08 Recognize shortcomings in financial statement analysis. Level: Medium Topic: Ratios
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Chapter 23 - Financial Statement Analysis
98. Selected ratios for Julienne Foods, Inc. and Brut Champagnes, Inc. are given. What do these ratios tell you about the companies regarding whether or not to invest in either of them and what additional information might be helpful in that decision?
Both companies appear to be strong and both seem to be managing their inventory and accounts receivable well. Either would be a good investment. However, Brut seems to be the stronger of the two companies because every ratio except the current ratio is higher. Before depending on a comparison between the companies, how much alike they are needs to be known. They can only be compared if they are companies in the same industry with similar products, etc. and this information wasn't given.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Medium Topic: Ratios
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Chapter 23 - Financial Statement Analysis
99. Selected financial ratios for Riparian Products and Escarpment Equipment are given. Assess the ratios given for each company and explain which company the ratios suggest is the stronger of the two.
The ratios shown indicate that they are both strong companies. The number of times bond interest is earned indicates that they can fairly easily pay their interest when due. For both companies stockholders provide about $1 of equity for each dollar of liability. This provides creditors assurance against possible loss. However, no information was given to indicate whether these companies are comparable. If they are similar companies they can be compared, otherwise a comparison could be misleading.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 23-08 Recognize shortcomings in financial statement analysis. Level: Medium Topic: Ratios
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Chapter 23 - Financial Statement Analysis
100. Selected financial ratios for Opus Company and its industry averages are given. What does the information suggest about Opus?
Opus is well able to pay its debts when due. Opus is profitable and seems to be run efficiently as indicated by the turnovers given. However, every ratio except the rate of return on sales is lower than the industry average. That ratio indicates that it retains $2.40 of each sales dollar, which is favorable, when compared with the industry average. Even though the other ratios are lower than the industry averages, they are still quite strong and not much lower than the averages given.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 23-05 Compute and interpret financial ratios that measure profitability; operating results; and efficiency. Learning Objective: 23-07 Compute and interpret financial ratios that measure liquidity. Level: Medium Topic: Ratios
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Chapter 24 - The Statement of Cash Flows
Chapter 24 The Statement of Cash Flows True / False Questions
1. Usually, there is a difference between the net income reported on the income statement and the net cash from operating activities shown on the statement of cash flows. True False
2. The statement of cash flows provides information about cash flows from operating activities, investing activities, and financing activities. True False
3. An increase or decrease in accounts payable during a fiscal period has no effect on the net cash provided by operating activities. True False
4. When a firm issues a long-term note payable, the amount that it receives for the note is considered a cash inflow from operating activities. True False
5. A sale of used equipment for cash produces a cash inflow from investing activities. True False
6. The payment of cash dividends to stockholders would be classified as a cash outflow resulting from a financing activity. True False
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Chapter 24 - The Statement of Cash Flows
7. The cash received from issuing common stock would not be reported on the statement of cash flows. True False
8. If a firm's accounts receivable increased during the fiscal period, it is necessary to subtract the amount of the increase from the net income when computing the net cash provided by operating activities. True False
9. When the net income is reconciled with the net cash provided by operating activities, depreciation expense is added to the net income. True False
10. The starting point for analyzing cash flows from operating activities is the beginning balance of cash. True False
11. When the net income is adjusted to arrive at the net cash provided by operating activities, the amount of the bond premium amortized is added to the net income. True False
12. In computing the cash flows from operating activities section, a loss on the sale of longterm assets must be deducted from net income. True False
13. Current assets and current liabilities are often referred to as operating assets and liabilities. True False
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Chapter 24 - The Statement of Cash Flows
14. Decreases in current assets must be deducted from net income to arrive at cash flows from operations. True False
15. If the income statement reflects a net loss for the year, the loss is not reported under cash flows from operating activities in the statement of cash flows. True False
16. The resale of treasury stock is classified as a cash inflow from financing activities. True False
17. Interest expense is treated as an outflow of cash from a financing activity. True False
18. The Financial Accounting Standards Board prefers the indirect method of preparing the statement of cash flows. True False
19. If the indirect method of preparing the statement of cash flows is used, a note disclosing the amount of interest and income taxes paid during the period must accompany the statement. True False
20. A complete set of published financial statements for a corporation must include a statement of cash flow. True False
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Chapter 24 - The Statement of Cash Flows
Fill in the Blank Questions
21. The purpose of the statement of ____________________ is to report the cash balance at the beginning and end of the fiscal period and to show the sources and uses of cash during the period. ________________________________________
22. Cash flows from ____________________ activities are the result of routine business transactions such as buying and selling merchandise. ________________________________________
23. On the statement of cash flows, cash and cash ____________________ consist of currency, bank accounts, and short-term, highly liquid investments. ________________________________________
24. Issuing stock for cash and paying dividends in cash would be classified as ____________________ activities on the statement of cash flows. ________________________________________
25. When the ____________________ method of preparing the statement of cash flows is used, the interest and income taxes paid during the period are disclosed in notes accompanying the statement. ________________________________________
26. Purchases and sales of land, buildings, and equipment for cash are shown as ____________________ activities on the statement of cash flows. ________________________________________
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Chapter 24 - The Statement of Cash Flows
27. If a corporation issued stock for $70,000 in cash, received $10,000 in cash from a longterm loan, and paid cash dividends totaling $20,000, the net cash provided by its financing activities would be ___________________. ________________________________________
28. On the statement of cash flows, it is necessary to reconcile the ____________________ with the net cash provided by operating activities. ________________________________________
29. The payment of maturing bonds would be treated as a cash outflow in the ____________________ activities section of the statement of cash flows. ________________________________________
30. Net income must be adjusted for changes in ____________________ assets and liabilities, such as accounts receivable and accounts payable, when determining the net cash provided by operating activities. ________________________________________
31. A gain on the sale of equipment is reported in the ____________________ activities section of the statement of cash flows. ________________________________________
32. The purchase of treasury stock is treated as a cash outflow in the ____________________ activities section of the statement of cash flows. ________________________________________
33. Interest expense is treated as an outflow of cash that results from a(n) ____________________ activity. ________________________________________
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Chapter 24 - The Statement of Cash Flows
34. The statement of cash flows assumes that the ____________________ basis of accounting is used when recording transactions and preparing the balance sheet and income statement. ________________________________________
35. In the ____________________ activities section of the statement of cash flows, net income is adjusted for the amortization of the premium on bonds payable. ________________________________________
Multiple Choice Questions
36. The net cash provided by operating activities is affected by A. a change in merchandise inventory. B. a purchase of land for cash. C. the issue of bonds payable for cash. D. proceeds of cash investments by stockholders.
37. Investing activities include A. purchases of merchandise for cash. B. purchases of plant and equipment for cash. C. purchases of prepaid expense items such as supplies and insurance for cash. D. increase in accounts receivable.
38. When the net cash provided by operating activities is determined, a gain on a sale of equipment should A. be added to the net income. B. be subtracted from the net income. C. not be used in the calculation. D. be reported in the cash flows from financing activities section.
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Chapter 24 - The Statement of Cash Flows
39. Cash and cash equivalents, as used on the statement of cash flows, consist of A. only currency and bank accounts. B. only bank accounts. C. currency, bank accounts, and all investments. D. currency, bank accounts and short-term, highly liquid investments.
40. An example of a financing activity is A. the sale of merchandise for cash. B. the issue of stock for cash. C. the sale of used equipment for cash. D. the purchase of a building.
41. A corporation received $50,000 in cash when it sold a building and paid $90,000 in cash when it purchased some new machinery. As a result, the statement of cash flows would report A. $40,000 as the net cash used in financing activities. B. $40,000 as the net cash provided by investing activities. C. $40,000 as the net cash used in investing activities. D. $40,000 as the net cash provided by financing activities.
42. A corporation received $80,000 in cash when it sold a building and paid $50,000 in cash when it purchased some new machinery. As a result, the statement of cash flows would report A. $30,000 as the net cash used in financing activities. B. $30,000 as the net cash provided by investing activities. C. $30,000 as the net cash used in investing activities. D. $30,000 as the net cash provided by financing activities.
43. A corporation received $80,000 in cash when it sold common stock and used the proceeds to pay $60,000 in bonds payable. As a result, the statement of cash flows would report A. $20,000 as the net cash used in financing activities. B. $20,000 as the net cash provided by investing activities. C. $20,000 as the net cash used in investing activities. D. $20,000 as the net cash provided by financing activities.
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Chapter 24 - The Statement of Cash Flows
44. On a statement of cash flows, depreciation expense is A. subtracted from net income in the computation of the net cash provided by operating activities. B. added to net income in the computation of the net cash provided by operating activities. C. treated as a cash outflow in the computation of the net cash used in investing activities. D. treated as a cash inflow in the computation of the net cash used in investing activities.
45. An example of an investing activity is A. the issue of preferred stock. B. the resale of treasury stock. C. the issue of bonds and notes payable. D. the purchase of property, plant, or equipment for cash.
46. An increase in accounts payable is A. added to the net income when determining the net cash provided by operating activities. B. subtracted from the net income when determining the net cash provided by operating activities. C. added to the cash flows from investing activities. D. not used to calculate the net cash provided by operating activities.
47. The method used by most corporations to prepare the statement of cash flows is the A. accrual method. B. direct method. C. deferral method. D. indirect method.
48. Generally, if a short-term investment is to be classified as a cash equivalent, it must fall due within A. 12 months from the date it was acquired. B. 6 months from the date it was acquired. C. 3 months from the date it was acquired. D. 1 month from the date it was acquired.
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Chapter 24 - The Statement of Cash Flows
49. On a statement of cash flows, an increase in a prepaid expense A. is included in computing cash flows from operating activities. B. is included in computing cash flows from investing activities. C. is included in computing cash flows from financing activities. D. is not used in computing cash flows.
50. When the net cash provided by operating activities is determined, an increase in income taxes payable should A. be subtracted from the net cash amount after other calculations have been made. B. be subtracted from the net income. C. not be used in the calculation. D. be added to the net income.
51. The payment of interest is considered to be A. an outflow of cash that results from a financing activity. B. an outflow of cash that results from an investing activity. C. an outflow of cash that results from an operating activity. D. an activity that is not reported on the statement of cash flows.
52. When the net cash provided by operating activities is determined, the amortization of bond premium A. should be added to the net income. B. should be subtracted from the net income. C. should not be used in the calculation. D. should be subtracted from the net cash amount after other calculations have been made.
53. Transactions that provide cash to the business to carry on its activities are A. operating activities. B. investing activities. C. financing activities. D. outflows or uses of cash.
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Chapter 24 - The Statement of Cash Flows
54. Transactions for the acquisition or disposal of long-term assets are A. operating activities. B. investing activities. C. financing activities. D. outflows or uses of cash.
55. Polyglot Services, Inc. sold equipment that cost $45,600 for $12,450. Depreciation on the equipment from purchase to date of sale amounted to $35,000. What amount is reported in the Cash Flows from Investing Activities section of the Statement of Cash Flows? A. $12,450 B. $0 C. $1,850 D. $10,600
56. Chattel Company sold for $7,000 equipment that originally cost $40,000 and had depreciation in the amount of $34,000 taken. What amount is reported in the Cash Flows from Financing Activities section of the Statement of Cash Flows? A. $6,000 B. $5,000 C. $0 D. $1,000
57. Chattel Company sold for $7,000 equipment that originally cost $40,000 and had depreciation in the amount of $34,000 taken. What amount is reported in the Cash Flows from Investing Activities section of the Statement of Cash Flows? A. $7,000 B. $6,000 C. $5,000 D. $1,000
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Chapter 24 - The Statement of Cash Flows
58. Chattel Company sold for $5,000 equipment that originally cost $40,000 and had depreciation in the amount of $34,000 taken. What amount is reported in the Cash Flows from Operating Activities section of the Statement of Cash Flows? A. $7,000 B. $6,000 C. $5,000 D. $1,000
59. Doff Manufacturing Co. sold equipment that cost $12,000 for $3,000. Depreciation of $10,000 had been taken on the equipment. How is the Cash Flows from Operating Activities affected? A. The loss of $1,000 is added to Net Income B. The gain of $1,000 is added to Net Income C. The gain of $1,000 is deducted from Net Income D. The loss of $1,000 is deducted from Net Income
60. Cannon Manufacturing Co. sold equipment that cost $18,000 for $6,000. A loss on sale of $1,000 was recorded. How is the Cash Flows from Operating Activities affected? A. The loss of $1,000 is added to Net Income. B. The loss of $6,000 is added to Net Income. C. The gain of $6,000 is deducted from Net Income. D. The loss of $1,000 is deducted from Net Income.
61. Cannon Manufacturing Co. sold equipment that cost $18,000 for $6,000. A loss on sale of $1,000 was recorded. How is the Cash Flows from Investing Activities affected? A. A cash inflow of $5,000 is recorded. B. A cash inflow of $6,000 is recorded. C. A cash inflow of $11,000 is recorded. D. A cash inflow of $12,000 is recorded.
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Chapter 24 - The Statement of Cash Flows
62. Eleemosynary Organization acquired land valued at $56,000 for 4,200 shares of its stock. Where on the Statement of Cash flows does this transaction activity appear? A. Operating Activities B. Investing Activities C. Financing Activities D. Disclosures
63. Corporations do not commonly use the direct method for the Statement of Cash Flows because A. they do not have easy access to the necessary information. B. FASB prefers the indirect method. C. the direct method does not follow GAAP. D. there are fewer disclosures required under the indirect method.
64. The purchase or resale of treasury stock is reported in which of the following categories? A. Operating Activities B. Investing Activities C. Financing Activities D. Disclosures
65. The retirement of bonds with cash by a company is reported under which of the following? A. Operating Activities B. Investing Activities C. Financing Activities D. Disclosures
66. Bastion Corporation paid $15,600 on its mortgage loan. The principal portion was $5,000 and the interest was $10,600. The $5,000 constitutes what on the Statement of Cash Flows? A. an outflow of cash under the financing activities section B. an outflow of cash under the operating activities section C. an outflow of cash under the investing activities section D. a disclosure of the interest paid
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Chapter 24 - The Statement of Cash Flows
The Natural Company's cash balance at December 31, 2015, was $150,000. The following information was reported on the company statement of cash flows for 2013:
67. The Natural Company's Statement of Cash Flows would report Cash Flows from Operating Activities totaling: A. $252,000. B. $286,000. C. $368,000. D. $470,000.
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Chapter 24 - The Statement of Cash Flows
68. The Natural Company's Statement of Cash Flows would report Cash Flows from Investing Activities totaling: A. $50,000. B. $84,000. C. $(284,000). D. $(250,000).
69. The Natural Company's Statement of Cash Flows would report Cash Flows from Financing Activities totaling: A. $500,000. B. $300,000. C. $275,000. D. $250,000.
70. The Natural Company's balance sheet would report the balance of Cash on December 31, 2013 A. $311,000. B. $410,000. C. $426,000. D. $461,000.
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Chapter 24 - The Statement of Cash Flows
Short Answer Questions
71. The current assets and liabilities of the Lionel Corporation on December 31, 2014 and 2013, are listed below. Lionel's net income for 2014 was $75,000. Included in its expenses was depreciation of $17,000. Prepare a schedule of cash flows from operating activities for 2014.
72. The following transactions occurred at the Lionel Corporation in 2013. Use this information to prepare Lionel's schedule of cash flows from investing activities. A) The company sold a used truck for $4,000 in cash. The original cost of the truck was $19,000. Depreciation of $14,000 had been deducted. B) The company purchased some new equipment for $25,000.
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Chapter 24 - The Statement of Cash Flows
73. The following transactions occurred at the Lionel Corporation in 2013. Use this information to prepare Lionel's schedule of cash flows from financing activities. A) The company issued 300 shares of its $50 par value common stock. B) Cash dividends of $25,000 were paid on common stock during the year.
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Chapter 24 - The Statement of Cash Flows
74. The following information is taken from the accounting records of the Gilford Corporation. Use this information to prepare Gilford's statement of cash flows for the year ended December 31, 2014.
Additional information: (a) Plant construction costing $40,000 in cash was completed. (b) Equipment was purchased for $20,000 in cash. (c) Common stock was sold for $50,000 in cash. (d) Bonds were issued for $15,000 in cash. (e) Common stock dividends of $20,000 were paid in cash. (f) Net income after income taxes was $35,000.
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Chapter 24 - The Statement of Cash Flows
75. Define cash equivalents and list three examples other than coin, currency, and bank accounts.
76. A list of sources and uses of cash are given below. Indicate on the line provided whether each is an operating, investing, or financing activity. ________ (a) purchase of land ________ (b) repayment of bond indebtedness ________ (c) sale of merchandise ________ (d) pay salaries and wages ________ (e) pay interest expense ________ (f) sale of office equipment ________ (g) dividends paid ________ (h) resale of Treasury Stock ________ (i) borrowing through a note payable ________ (j) dividend income
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Chapter 24 - The Statement of Cash Flows
77. For each of the following operating activities, indicate whether it is a source of cash, a use of cash, or neither under the indirect method. ________ (a) increase in Accounts Receivable ________ (b) increase in Prepaid Expense ________ (c) increase in Inventory ________ (d) increase in Accounts Payable ________ (e) decrease in Supplies ________ (f) bond discount amortization
78. Why are depreciation expense and amortization expense added to Net Income under the indirect method?
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Chapter 24 - The Statement of Cash Flows
79. The Other Income and Other Expense sections of an Income Statement are shown below. In preparing the Cash Flows from Operating Activities section of the statement of Cash Flows using the indirect method, indicate how each item would be handled. (Assume all line items involved cash.)
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Chapter 24 - The Statement of Cash Flows
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Chapter 24 - The Statement of Cash Flows
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Chapter 24 - The Statement of Cash Flows
Additional information: Plant assets that originally cost $67,200 were sold for $56,000, resulting in a gain of $8,200. Dividends of $35,815 were declared and paid. There were no dividends declared in 2013.
80. Using the information provided, prepare the cash flows from operating activities for The Kerfuffle Company using the indirect method.
81. Using the information provided, prepare the cash flows from investing activities for The Kerfuffle Company.
82. Using the information provided, prepare the cash flows from financing activities for The Kerfuffle Company.
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Chapter 24 - The Statement of Cash Flows
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Chapter 24 - The Statement of Cash Flows
Additional information: Equipment costing $100,000 was sold for $70,000. Accumulated depreciation on this
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Chapter 24 - The Statement of Cash Flows
equipment was $20,000. Dividends of $38,000 were declared and paid. Bonds were issued at face value of $300,000. Common stock of $55,000 was issued to acquire land. Investments (stock in IBM) were purchased for $275,000.
83. Using the information provided, prepare the cash flows from operating activities for The Dolmen Company.
84. Using the information provided, prepare the cash flows from investing activities for The Dolmen Company.
85. Using the information provided, prepare the cash flows from financing activities for The Dolmen Company.
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Chapter 24 - The Statement of Cash Flows
86. Explain the differences between the direct and the indirect methods of preparing the operating activities of the statement of cash flows.
87. List some examples of transactions or activities within a company that must be disclosed in the Statement of Cash Flows.
88. Why is the Statement of Cash Flows important?
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Chapter 24 - The Statement of Cash Flows
89. From the information provided, prepare the final three lines of Magalog Distributing's Statement of Cash Flows.
90. Echt Manufacturing sold equipment that originally cost $78,400 for $54,300 cash on April 1st of 2015. This equipment was purchased on January 2, 2013, had a salvage value of $8,400, a useful life of ten years, and was depreciated under the straight-line method of depreciation. How will this transaction be originally reported on Echt's 2015 Income Statement? How will this transaction be reported on the Statement of Cash Flows for 2015? (Assume that the indirect method was used.)
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Chapter 24 - The Statement of Cash Flows
Chapter 24 The Statement of Cash Flows Answer Key
True / False Questions
1. Usually, there is a difference between the net income reported on the income statement and the net cash from operating activities shown on the statement of cash flows. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
2. The statement of cash flows provides information about cash flows from operating activities, investing activities, and financing activities. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Easy Topic: Sources and Uses of Cash
3. An increase or decrease in accounts payable during a fiscal period has no effect on the net cash provided by operating activities. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
24-29
Chapter 24 - The Statement of Cash Flows
4. When a firm issues a long-term note payable, the amount that it receives for the note is considered a cash inflow from operating activities. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 24-04 Compute cash flows from financing activities. Level: Easy Topic: Cash Flows from Investing and Financing
5. A sale of used equipment for cash produces a cash inflow from investing activities. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-03 Compute cash flows from investing activities. Level: Easy Topic: Cash Flows from Investing and Financing
6. The payment of cash dividends to stockholders would be classified as a cash outflow resulting from a financing activity. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 24-04 Compute cash flows from financing activities. Level: Easy Topic: Cash Flows from Investing and Financing
7. The cash received from issuing common stock would not be reported on the statement of cash flows. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 24-04 Compute cash flows from financing activities. Level: Easy Topic: Cash Flows from Investing and Financing
24-30
Chapter 24 - The Statement of Cash Flows
8. If a firm's accounts receivable increased during the fiscal period, it is necessary to subtract the amount of the increase from the net income when computing the net cash provided by operating activities. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
9. When the net income is reconciled with the net cash provided by operating activities, depreciation expense is added to the net income. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
10. The starting point for analyzing cash flows from operating activities is the beginning balance of cash. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
24-31
Chapter 24 - The Statement of Cash Flows
11. When the net income is adjusted to arrive at the net cash provided by operating activities, the amount of the bond premium amortized is added to the net income. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
12. In computing the cash flows from operating activities section, a loss on the sale of longterm assets must be deducted from net income. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
13. Current assets and current liabilities are often referred to as operating assets and liabilities. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
14. Decreases in current assets must be deducted from net income to arrive at cash flows from operations. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
24-32
Chapter 24 - The Statement of Cash Flows
15. If the income statement reflects a net loss for the year, the loss is not reported under cash flows from operating activities in the statement of cash flows. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
16. The resale of treasury stock is classified as a cash inflow from financing activities. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-04 Compute cash flows from financing activities. Level: Easy Topic: Cash Flows from Investing and Financing
17. Interest expense is treated as an outflow of cash from a financing activity. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Easy Topic: Sources and Uses of Cash
18. The Financial Accounting Standards Board prefers the indirect method of preparing the statement of cash flows. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-05 Prepare a statement of cash flows. Level: Easy Topic: Cash Flows from Investing and Financing
24-33
Chapter 24 - The Statement of Cash Flows
19. If the indirect method of preparing the statement of cash flows is used, a note disclosing the amount of interest and income taxes paid during the period must accompany the statement. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-05 Prepare a statement of cash flows. Level: Easy Topic: Cash Flows from Investing and Financing
20. A complete set of published financial statements for a corporation must include a statement of cash flow. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Easy Topic: Sources and Uses of Cash
Fill in the Blank Questions
21. The purpose of the statement of ____________________ is to report the cash balance at the beginning and end of the fiscal period and to show the sources and uses of cash during the period. cash flows
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Easy Topic: Sources and Uses of Cash
24-34
Chapter 24 - The Statement of Cash Flows
22. Cash flows from ____________________ activities are the result of routine business transactions such as buying and selling merchandise. operating
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Sources and Uses of Cash
23. On the statement of cash flows, cash and cash ____________________ consist of currency, bank accounts, and short-term, highly liquid investments. equivalents
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Easy Topic: Sources and Uses of Cash
24. Issuing stock for cash and paying dividends in cash would be classified as ____________________ activities on the statement of cash flows. financing
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-04 Compute cash flows from financing activities. Level: Easy Topic: Cash Flows from Investing and Financing
24-35
Chapter 24 - The Statement of Cash Flows
25. When the ____________________ method of preparing the statement of cash flows is used, the interest and income taxes paid during the period are disclosed in notes accompanying the statement. indirect
AACSB: Analytic AICPA BB: Legal Bloom's: Understand Learning Objective: 24-05 Prepare a statement of cash flows. Level: Easy Topic: Cash Flows from Investing and Financing
26. Purchases and sales of land, buildings, and equipment for cash are shown as ____________________ activities on the statement of cash flows. investing
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-03 Compute cash flows from investing activities. Level: Easy Topic: Cash Flows from Investing and Financing
27. If a corporation issued stock for $70,000 in cash, received $10,000 in cash from a longterm loan, and paid cash dividends totaling $20,000, the net cash provided by its financing activities would be ___________________. $60,000
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 24-04 Compute cash flows from financing activities. Level: Medium Topic: Cash Flows from Investing and Financing
24-36
Chapter 24 - The Statement of Cash Flows
28. On the statement of cash flows, it is necessary to reconcile the ____________________ with the net cash provided by operating activities. net income
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
29. The payment of maturing bonds would be treated as a cash outflow in the ____________________ activities section of the statement of cash flows. financing
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-04 Compute cash flows from financing activities. Level: Easy Topic: Cash Flows from Investing and Financing
30. Net income must be adjusted for changes in ____________________ assets and liabilities, such as accounts receivable and accounts payable, when determining the net cash provided by operating activities. current
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
24-37
Chapter 24 - The Statement of Cash Flows
31. A gain on the sale of equipment is reported in the ____________________ activities section of the statement of cash flows. operating
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
32. The purchase of treasury stock is treated as a cash outflow in the ____________________ activities section of the statement of cash flows. financing
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-04 Compute cash flows from financing activities. Level: Easy Topic: Cash Flows from Investing and Financing
33. Interest expense is treated as an outflow of cash that results from a(n) ____________________ activity. operating
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Easy Topic: Sources and Uses of Cash
34. The statement of cash flows assumes that the ____________________ basis of accounting is used when recording transactions and preparing the balance sheet and income statement. accrual
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-05 Prepare a statement of cash flows. Level: Easy Topic: Cash Flows from Investing and Financing
24-38
Chapter 24 - The Statement of Cash Flows
35. In the ____________________ activities section of the statement of cash flows, net income is adjusted for the amortization of the premium on bonds payable. operating
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
Multiple Choice Questions
36. The net cash provided by operating activities is affected by A. a change in merchandise inventory. B. a purchase of land for cash. C. the issue of bonds payable for cash. D. proceeds of cash investments by stockholders.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
37. Investing activities include A. purchases of merchandise for cash. B. purchases of plant and equipment for cash. C. purchases of prepaid expense items such as supplies and insurance for cash. D. increase in accounts receivable.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-03 Compute cash flows from investing activities. Level: Easy Topic: Cash Flows from Investing and Financing
24-39
Chapter 24 - The Statement of Cash Flows
38. When the net cash provided by operating activities is determined, a gain on a sale of equipment should A. be added to the net income. B. be subtracted from the net income. C. not be used in the calculation. D. be reported in the cash flows from financing activities section.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
39. Cash and cash equivalents, as used on the statement of cash flows, consist of A. only currency and bank accounts. B. only bank accounts. C. currency, bank accounts, and all investments. D. currency, bank accounts and short-term, highly liquid investments.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Easy Topic: Sources and Uses of Cash
40. An example of a financing activity is A. the sale of merchandise for cash. B. the issue of stock for cash. C. the sale of used equipment for cash. D. the purchase of a building.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-04 Compute cash flows from financing activities. Level: Easy Topic: Cash Flows from Investing and Financing
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Chapter 24 - The Statement of Cash Flows
41. A corporation received $50,000 in cash when it sold a building and paid $90,000 in cash when it purchased some new machinery. As a result, the statement of cash flows would report A. $40,000 as the net cash used in financing activities. B. $40,000 as the net cash provided by investing activities. C. $40,000 as the net cash used in investing activities. D. $40,000 as the net cash provided by financing activities.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 24-03 Compute cash flows from investing activities. Level: Medium Topic: Cash Flows from Investing and Financing
42. A corporation received $80,000 in cash when it sold a building and paid $50,000 in cash when it purchased some new machinery. As a result, the statement of cash flows would report A. $30,000 as the net cash used in financing activities. B. $30,000 as the net cash provided by investing activities. C. $30,000 as the net cash used in investing activities. D. $30,000 as the net cash provided by financing activities.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 24-03 Compute cash flows from investing activities. Level: Medium Topic: Cash Flows from Investing and Financing
43. A corporation received $80,000 in cash when it sold common stock and used the proceeds to pay $60,000 in bonds payable. As a result, the statement of cash flows would report A. $20,000 as the net cash used in financing activities. B. $20,000 as the net cash provided by investing activities. C. $20,000 as the net cash used in investing activities. D. $20,000 as the net cash provided by financing activities.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 24-03 Compute cash flows from investing activities. Level: Medium Topic: Cash Flows from Investing and Financing
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Chapter 24 - The Statement of Cash Flows
44. On a statement of cash flows, depreciation expense is A. subtracted from net income in the computation of the net cash provided by operating activities. B. added to net income in the computation of the net cash provided by operating activities. C. treated as a cash outflow in the computation of the net cash used in investing activities. D. treated as a cash inflow in the computation of the net cash used in investing activities.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
45. An example of an investing activity is A. the issue of preferred stock. B. the resale of treasury stock. C. the issue of bonds and notes payable. D. the purchase of property, plant, or equipment for cash.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-03 Compute cash flows from investing activities. Level: Easy Topic: Cash Flows from Investing and Financing
46. An increase in accounts payable is A. added to the net income when determining the net cash provided by operating activities. B. subtracted from the net income when determining the net cash provided by operating activities. C. added to the cash flows from investing activities. D. not used to calculate the net cash provided by operating activities.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
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Chapter 24 - The Statement of Cash Flows
47. The method used by most corporations to prepare the statement of cash flows is the A. accrual method. B. direct method. C. deferral method. D. indirect method.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-05 Prepare a statement of cash flows. Level: Easy Topic: Cash Flows from Investing and Financing
48. Generally, if a short-term investment is to be classified as a cash equivalent, it must fall due within A. 12 months from the date it was acquired. B. 6 months from the date it was acquired. C. 3 months from the date it was acquired. D. 1 month from the date it was acquired.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Easy Topic: Sources and Uses of Cash
49. On a statement of cash flows, an increase in a prepaid expense A. is included in computing cash flows from operating activities. B. is included in computing cash flows from investing activities. C. is included in computing cash flows from financing activities. D. is not used in computing cash flows.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
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Chapter 24 - The Statement of Cash Flows
50. When the net cash provided by operating activities is determined, an increase in income taxes payable should A. be subtracted from the net cash amount after other calculations have been made. B. be subtracted from the net income. C. not be used in the calculation. D. be added to the net income.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
51. The payment of interest is considered to be A. an outflow of cash that results from a financing activity. B. an outflow of cash that results from an investing activity. C. an outflow of cash that results from an operating activity. D. an activity that is not reported on the statement of cash flows.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Easy Topic: Sources and Uses of Cash
52. When the net cash provided by operating activities is determined, the amortization of bond premium A. should be added to the net income. B. should be subtracted from the net income. C. should not be used in the calculation. D. should be subtracted from the net cash amount after other calculations have been made.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities
24-44
Chapter 24 - The Statement of Cash Flows
53. Transactions that provide cash to the business to carry on its activities are A. operating activities. B. investing activities. C. financing activities. D. outflows or uses of cash.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Learning Objective: 24-04 Compute cash flows from financing activities. Learning Objective: 24-06 Define the accounting terms new to this chapter. Level: Easy Topic: Cash Flows from Investing and Financing Activities Topic: Sources and Uses of Cash
54. Transactions for the acquisition or disposal of long-term assets are A. operating activities. B. investing activities. C. financing activities. D. outflows or uses of cash.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Learning Objective: 24-03 Compute cash flows from investing activities. Learning Objective: 24-06 Define the accounting terms new to this chapter. Level: Easy Topic: Cash Flows from Investing and Financing Activities Topic: Sources and Uses of Cash
24-45
Chapter 24 - The Statement of Cash Flows
55. Polyglot Services, Inc. sold equipment that cost $45,600 for $12,450. Depreciation on the equipment from purchase to date of sale amounted to $35,000. What amount is reported in the Cash Flows from Investing Activities section of the Statement of Cash Flows? A. $12,450 B. $0 C. $1,850 D. $10,600
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Learning Objective: 24-03 Compute cash flows from investing activities. Level: Medium Topic: Cash Flows from Investing and Financing Activities Topic: Sources and Uses of Cash
56. Chattel Company sold for $7,000 equipment that originally cost $40,000 and had depreciation in the amount of $34,000 taken. What amount is reported in the Cash Flows from Financing Activities section of the Statement of Cash Flows? A. $6,000 B. $5,000 C. $0 D. $1,000
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Medium Topic: Sources and Uses of Cash
24-46
Chapter 24 - The Statement of Cash Flows
57. Chattel Company sold for $7,000 equipment that originally cost $40,000 and had depreciation in the amount of $34,000 taken. What amount is reported in the Cash Flows from Investing Activities section of the Statement of Cash Flows? A. $7,000 B. $6,000 C. $5,000 D. $1,000
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Medium Topic: Sources and Uses of Cash
58. Chattel Company sold for $5,000 equipment that originally cost $40,000 and had depreciation in the amount of $34,000 taken. What amount is reported in the Cash Flows from Operating Activities section of the Statement of Cash Flows? A. $7,000 B. $6,000 C. $5,000 D. $1,000
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Medium Topic: Sources and Uses of Cash
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Chapter 24 - The Statement of Cash Flows
59. Doff Manufacturing Co. sold equipment that cost $12,000 for $3,000. Depreciation of $10,000 had been taken on the equipment. How is the Cash Flows from Operating Activities affected? A. The loss of $1,000 is added to Net Income B. The gain of $1,000 is added to Net Income C. The gain of $1,000 is deducted from Net Income D. The loss of $1,000 is deducted from Net Income
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 24-02 Compute cash flows from operating activities. Learning Objective: 24-05 Prepare a statement of cash flows. Level: Medium Topic: Cash Flows from Investing and Financing
60. Cannon Manufacturing Co. sold equipment that cost $18,000 for $6,000. A loss on sale of $1,000 was recorded. How is the Cash Flows from Operating Activities affected? A. The loss of $1,000 is added to Net Income. B. The loss of $6,000 is added to Net Income. C. The gain of $6,000 is deducted from Net Income. D. The loss of $1,000 is deducted from Net Income.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 24-02 Compute cash flows from operating activities. Learning Objective: 24-05 Prepare a statement of cash flows. Level: Medium Topic: Cash Flows from Investing and Financing
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Chapter 24 - The Statement of Cash Flows
61. Cannon Manufacturing Co. sold equipment that cost $18,000 for $6,000. A loss on sale of $1,000 was recorded. How is the Cash Flows from Investing Activities affected? A. A cash inflow of $5,000 is recorded. B. A cash inflow of $6,000 is recorded. C. A cash inflow of $11,000 is recorded. D. A cash inflow of $12,000 is recorded.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 24-02 Compute cash flows from operating activities. Learning Objective: 24-05 Prepare a statement of cash flows. Level: Medium Topic: Cash Flows from Investing and Financing
62. Eleemosynary Organization acquired land valued at $56,000 for 4,200 shares of its stock. Where on the Statement of Cash flows does this transaction activity appear? A. Operating Activities B. Investing Activities C. Financing Activities D. Disclosures
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-05 Prepare a statement of cash flows. Level: Easy Topic: Cash Flows from Investing and Financing
63. Corporations do not commonly use the direct method for the Statement of Cash Flows because A. they do not have easy access to the necessary information. B. FASB prefers the indirect method. C. the direct method does not follow GAAP. D. there are fewer disclosures required under the indirect method.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 24-05 Prepare a statement of cash flows. Level: Easy Topic: Cash Flows from Investing and Financing
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Chapter 24 - The Statement of Cash Flows
64. The purchase or resale of treasury stock is reported in which of the following categories? A. Operating Activities B. Investing Activities C. Financing Activities D. Disclosures
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 24-04 Compute cash flows from financing activities. Level: Easy Topic: Cash Flows from Investing and Financing
65. The retirement of bonds with cash by a company is reported under which of the following? A. Operating Activities B. Investing Activities C. Financing Activities D. Disclosures
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 24-04 Compute cash flows from financing activities. Level: Easy Topic: Cash Flows from Investing and Financing
66. Bastion Corporation paid $15,600 on its mortgage loan. The principal portion was $5,000 and the interest was $10,600. The $5,000 constitutes what on the Statement of Cash Flows? A. an outflow of cash under the financing activities section B. an outflow of cash under the operating activities section C. an outflow of cash under the investing activities section D. a disclosure of the interest paid
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Learning Objective: 24-04 Compute cash flows from financing activities. Level: Medium Topic: Cash Flows from Investing and Financing Activities Topic: Sources and Uses of Cash
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Chapter 24 - The Statement of Cash Flows
The Natural Company's cash balance at December 31, 2015, was $150,000. The following information was reported on the company statement of cash flows for 2013:
67. The Natural Company's Statement of Cash Flows would report Cash Flows from Operating Activities totaling: A. $252,000. B. $286,000. C. $368,000. D. $470,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 24-02 Compute cash flows from operating activities. Level: Medium Topic: Cash Flows from Operating Activities
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Chapter 24 - The Statement of Cash Flows
68. The Natural Company's Statement of Cash Flows would report Cash Flows from Investing Activities totaling: A. $50,000. B. $84,000. C. $(284,000). D. $(250,000).
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 24-03 Compute cash flows from investing activities. Level: Medium Topic: Cash Flows from Investing and Financing
69. The Natural Company's Statement of Cash Flows would report Cash Flows from Financing Activities totaling: A. $500,000. B. $300,000. C. $275,000. D. $250,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 24-05 Prepare a statement of cash flows. Level: Medium Topic: Cash Flows from Investing and Financing
24-52
Chapter 24 - The Statement of Cash Flows
70. The Natural Company's balance sheet would report the balance of Cash on December 31, 2013 A. $311,000. B. $410,000. C. $426,000. D. $461,000.
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Chapter 24 - The Statement of Cash Flows
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Chapter 24 - The Statement of Cash Flows
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 24-02 Compute cash flows from operating activities. Learning Objective: 24-03 Compute cash flows from investing activities. Learning Objective: 24-04 Compute cash flows from financing activities. Level: Medium Topic: Cash Flows from Investing and Financing
24-55
Chapter 24 - The Statement of Cash Flows
Short Answer Questions
71. The current assets and liabilities of the Lionel Corporation on December 31, 2014 and 2013, are listed below. Lionel's net income for 2014 was $75,000. Included in its expenses was depreciation of $17,000. Prepare a schedule of cash flows from operating activities for 2014.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 24-02 Compute cash flows from operating activities. Level: Medium Topic: Cash Flows from Operating Activities
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Chapter 24 - The Statement of Cash Flows
72. The following transactions occurred at the Lionel Corporation in 2013. Use this information to prepare Lionel's schedule of cash flows from investing activities. A) The company sold a used truck for $4,000 in cash. The original cost of the truck was $19,000. Depreciation of $14,000 had been deducted. B) The company purchased some new equipment for $25,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 24-03 Compute cash flows from investing activities. Level: Medium Topic: Cash Flows from Investing and Financing
24-57
Chapter 24 - The Statement of Cash Flows
73. The following transactions occurred at the Lionel Corporation in 2013. Use this information to prepare Lionel's schedule of cash flows from financing activities. A) The company issued 300 shares of its $50 par value common stock. B) Cash dividends of $25,000 were paid on common stock during the year.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 24-04 Compute cash flows from financing activities. Level: Medium Topic: Cash Flows from Investing and Financing
24-58
Chapter 24 - The Statement of Cash Flows
74. The following information is taken from the accounting records of the Gilford Corporation. Use this information to prepare Gilford's statement of cash flows for the year ended December 31, 2014.
Additional information: (a) Plant construction costing $40,000 in cash was completed. (b) Equipment was purchased for $20,000 in cash. (c) Common stock was sold for $50,000 in cash. (d) Bonds were issued for $15,000 in cash. (e) Common stock dividends of $20,000 were paid in cash. (f) Net income after income taxes was $35,000.
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Chapter 24 - The Statement of Cash Flows
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Chapter 24 - The Statement of Cash Flows
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Learning Objective: 24-02 Compute cash flows from operating activities. Learning Objective: 24-03 Compute cash flows from investing activities. Learning Objective: 24-04 Compute cash flows from financing activities. Learning Objective: 24-05 Prepare a statement of cash flows. Level: Medium Topic: Cash Flows from Investing and Financing Activities Topic: Cash Flows from Operating Activities Topic: Sources and Uses of Cash
75. Define cash equivalents and list three examples other than coin, currency, and bank accounts. Cash equivalents are included in cash on financial statements. They include certificates of deposits, U. S. Treasury bills, money market funds, and short-term investments with a maturity date within three months of the acquisition date.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Easy Topic: Sources and Uses of Cash
24-61
Chapter 24 - The Statement of Cash Flows
76. A list of sources and uses of cash are given below. Indicate on the line provided whether each is an operating, investing, or financing activity. ________ (a) purchase of land ________ (b) repayment of bond indebtedness ________ (c) sale of merchandise ________ (d) pay salaries and wages ________ (e) pay interest expense ________ (f) sale of office equipment ________ (g) dividends paid ________ (h) resale of Treasury Stock ________ (i) borrowing through a note payable ________ (j) dividend income (a) investing, (b) financing, (c) operating, (d) operating, (e) operating, (f) investing, (g) financing, (h) financing, (i) financing, (j) operating
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Easy Topic: Sources and Uses of Cash
77. For each of the following operating activities, indicate whether it is a source of cash, a use of cash, or neither under the indirect method. ________ (a) increase in Accounts Receivable ________ (b) increase in Prepaid Expense ________ (c) increase in Inventory ________ (d) increase in Accounts Payable ________ (e) decrease in Supplies ________ (f) bond discount amortization (a) use, (b) use, (c) use, (d) source, (e) source, (f) neither (noncash item)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Learning Objective: 24-02 Compute cash flows from operating activities. Level: Medium Topic: Cash Flows from Operating Activities Topic: Sources and Uses of Cash
24-62
Chapter 24 - The Statement of Cash Flows
78. Why are depreciation expense and amortization expense added to Net Income under the indirect method? They are both adjusting entries and do not affect cash. The Statement of Cash Flows is for cash transactions and since they do not involve cash, they must be removed from net income.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Easy Topic: Sources and Uses of Cash
24-63
Chapter 24 - The Statement of Cash Flows
79. The Other Income and Other Expense sections of an Income Statement are shown below. In preparing the Cash Flows from Operating Activities section of the statement of Cash Flows using the indirect method, indicate how each item would be handled. (Assume all line items involved cash.)
The Gain on Sale of Vehicle would be deducted from Net Income as the entire proceeds from the sale will be shown in the investing activities section of the Statement of Cash Flows. The Loss on Sales of Equipment would be added to Net Income as the entire proceeds from the sale will be shown in the investing activities section of the Statement of Cash Flows. The Interest Income and Bond Interest Expense would be ignored as they belong in Net Income and will therefore remain a part of Operating Activities.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Learning Objective: 24-02 Compute cash flows from operating activities. Level: Easy Topic: Cash Flows from Operating Activities Topic: Sources and Uses of Cash
24-64
Chapter 24 - The Statement of Cash Flows
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Chapter 24 - The Statement of Cash Flows
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Chapter 24 - The Statement of Cash Flows
Additional information: Plant assets that originally cost $67,200 were sold for $56,000, resulting in a gain of $8,200. Dividends of $35,815 were declared and paid. There were no dividends declared in 2013.
80. Using the information provided, prepare the cash flows from operating activities for The Kerfuffle Company using the indirect method.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Learning Objective: 24-02 Compute cash flows from operating activities. Level: Medium Topic: Cash Flows from Investing and Financing Activities Topic: Cash Flows from Operating Activities Topic: Sources and Uses of Cash
24-67
Chapter 24 - The Statement of Cash Flows
81. Using the information provided, prepare the cash flows from investing activities for The Kerfuffle Company.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Learning Objective: 24-03 Compute cash flows from investing activities. Level: Medium Topic: Cash Flows from Investing and Financing Activities Topic: Sources and Uses of Cash
82. Using the information provided, prepare the cash flows from financing activities for The Kerfuffle Company.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Learning Objective: 24-04 Compute cash flows from financing activities. Level: Medium Topic: Cash Flows from Investing and Financing Activities Topic: Sources and Uses of Cash
24-68
Chapter 24 - The Statement of Cash Flows
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Chapter 24 - The Statement of Cash Flows
Additional information: Equipment costing $100,000 was sold for $70,000. Accumulated depreciation on this
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Chapter 24 - The Statement of Cash Flows
equipment was $20,000. Dividends of $38,000 were declared and paid. Bonds were issued at face value of $300,000. Common stock of $55,000 was issued to acquire land. Investments (stock in IBM) were purchased for $275,000.
83. Using the information provided, prepare the cash flows from operating activities for The Dolmen Company.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Learning Objective: 24-02 Compute cash flows from operating activities. Level: Medium Topic: Cash Flows from Operating Activities Topic: Sources and Uses of Cash
24-71
Chapter 24 - The Statement of Cash Flows
84. Using the information provided, prepare the cash flows from investing activities for The Dolmen Company.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Learning Objective: 24-03 Compute cash flows from investing activities. Level: Medium Topic: Cash Flows from Investing and Financing Activities Topic: Sources and Uses of Cash
85. Using the information provided, prepare the cash flows from financing activities for The Dolmen Company.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Learning Objective: 24-04 Compute cash flows from financing activities. Level: Medium Topic: Cash Flows from Investing and Financing Activities Topic: Sources and Uses of Cash
24-72
Chapter 24 - The Statement of Cash Flows
86. Explain the differences between the direct and the indirect methods of preparing the operating activities of the statement of cash flows.
Direct Method All revenue and expenses that appear on the Income Statement appear in the operating section of the statement of cash flows with the cash received or paid out for each type of transaction shown. The major classes are: gross cash receipts and gross cash payments. Additional information, if meaningful and feasible, is also reported. This method is not commonly used. Indirect Method This method starts with Net Income and adjusts it for changes in current assets and liabilities associated with it. Noncash transactions that are included in Net Income are removed. Also, other items, such as gains or losses from the sale of assets are removed from Net Income. Most companies use the indirect method.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 24-05 Prepare a statement of cash flows. Level: Medium Topic: Cash Flows from Investing and Financing
87. List some examples of transactions or activities within a company that must be disclosed in the Statement of Cash Flows. Cash payments for income taxes and cash payments for interest are separately disclosed if the indirect method is used. Also, information about noncash investing and financing activities are disclosed on the statement (i.e., trading equipment with another entity with no cash involved, issuing bonds or stock for an asset or for assets).
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 24-05 Prepare a statement of cash flows. Level: Easy Topic: Cash Flows from Investing and Financing
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Chapter 24 - The Statement of Cash Flows
88. Why is the Statement of Cash Flows important? The information provided in the statement of cash flows is used by creditors, suppliers, and investors. They want to determine how the firm will pay its debts and the interest due on those debts. Management is interested in the cash flows of the company. Also, analyzing the sources and uses of cash gives management information necessary to plan for the future.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 24-01 Distinguish between operating; investing; and financing activities. Level: Easy Topic: Sources and Uses of Cash
24-74
Chapter 24 - The Statement of Cash Flows
89. From the information provided, prepare the final three lines of Magalog Distributing's Statement of Cash Flows.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 24-05 Prepare a statement of cash flows. Level: Medium Topic: Cash Flows from Investing and Financing
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Chapter 24 - The Statement of Cash Flows
90. Echt Manufacturing sold equipment that originally cost $78,400 for $54,300 cash on April 1st of 2015. This equipment was purchased on January 2, 2013, had a salvage value of $8,400, a useful life of ten years, and was depreciated under the straight-line method of depreciation. How will this transaction be originally reported on Echt's 2015 Income Statement? How will this transaction be reported on the Statement of Cash Flows for 2015? (Assume that the indirect method was used.) Depreciable basis of the equipment is $70,000 and one year's depreciation is $7,000. The depreciation for the current year is $1,750. This amount would be in the total depreciation expense and was removed from Net Income. The book value of this asset is $62,650 ($78,400 less A/D of $15,750). Therefore, Echt experienced a loss of $8,350 that will appear on the Income Statement. In the cash flows from operating activities section of the Statement of Cash Flows, the gain will have to be removed from Net Income. In the cash flows from investing activities, the entire proceeds of $54,300 will be shown.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 24-02 Compute cash flows from operating activities. Learning Objective: 24-03 Compute cash flows from investing activities. Level: Hard Topic: Cash Flows from Investing and Financing Activities Topic: Cash Flows from Operating Activities
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Chapter 25 - Departmentalized Profit and Cost Centers
Chapter 25 Departmentalized Profit and Cost Centers True / False Questions
1. For accounting purposes, both revenue and cost data are accumulated for a profit center. True False
2. A company may have several cost centers, but it can have only one profit center. True False
3. In departmental accounting, any costs and expenses not directly related to a specific department are allocated to all departments. True False
4. The amount of floor space occupied by each department is a common basis for allocating rent expense or utilities expense. True False
5. Some indirect costs may be allocated on the basis of departmental sales in proportion to total sales. True False
6. Management decisions involving the elimination of a department should be based on the contribution margin of the department. True False
7. Traditional financial statements may not contain adequate information for managing a business. True False
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Chapter 25 - Departmentalized Profit and Cost Centers
8. Cost centers do not directly earn revenue. True False
9. The purchasing, information systems, and maintenance departments are examples of profit centers of a company. True False
10. Responsibility accounting provides detailed data for each cost center and profit center so that management can determine how efficiently the individual segments are functioning. True False
11. When a business is organized into separate departments, it is necessary to provide accounting information about each department. True False
12. When a departmentalized income statement is to be prepared, the sales journal must be departmentalized. True False
13. Semidirect and indirect expenses are allocated to the sales department at the time the expenses are incurred. True False
14. Allocated expenses can be rounded to the nearest whole dollar on departmental income statements. True False
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Chapter 25 - Departmentalized Profit and Cost Centers
15. Office expenses such as postage and stationery should be allocated on the basis of contribution margin of each department. True False
16. Office salaries expense should be allocated on the basis of total sales in each department. True False
17. Nonoperating income, such as interest income, should be allocated on the basis of total sales in each department. True False
18. Contribution margin is another name for gross profit. True False
19. A department that has a positive contribution margin is contributing something toward the net income of the business. True False
20. The difficulty of fairly allocating direct expenses is one limitation of departmental income statements. True False
Fill in the Blank Questions
21. Departments that provide services to other departments of the firm are often organized as ____________________ centers. ________________________________________
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Chapter 25 - Departmentalized Profit and Cost Centers
22. In departmental accounting, expenses that can be closely identified with an individual department are referred to as ____________________ expenses. ________________________________________
23. The difference between a department's gross profit on sales and its direct expenses is called ___________________. ________________________________________
24. Operating expenses that cannot be easily assigned to particular departments at the time transactions occur and are recorded are called ____________________ expenses. ________________________________________
25. A systematic and logical way to allocate the rent expense for a building to various sales departments would be on the basis of ___________________. ________________________________________
26. A department's ____________________ is usually more important than its net income or net loss when management is considering whether to close the department. ________________________________________
27. Eliminating a department that has a negative contribution margin would result in ____________________ net income for the company than if the department were not eliminated. ________________________________________
28. If an attempt is made to identify and accumulate both revenue and cost data for a specific segment of a company, that segment is called a(n) ____________________ center. ________________________________________
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Chapter 25 - Departmentalized Profit and Cost Centers
29. The basic principle of ____________________ accounting is that management should be able to evaluate the performance of each segment of the business and pinpoint responsibility for its financial results. ________________________________________
30. The price at which goods are moved from one segment of a company to another is the ____________________ price. ________________________________________
31. Expenses that are closely related to the activities in each department, but cannot be allocated to any specific department are called ____________________ expenses. ________________________________________
32. The area of accounting that provides financial information about individual segments, activities, or products of a business is called ____________________ accounting. ________________________________________
33. A logical way to allocate janitorial wages to various departments would be on the basis of ___________________. ________________________________________
34. Department A had total sales of $40,000 and Department B had total sales of $10,000. If office salaries expense is allocated on the basis of total sales, ____________________ percent would be used to determine the allocation for Department B. ________________________________________
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Chapter 25 - Departmentalized Profit and Cost Centers
35. The Copying Department occupied 9,000 square feet of space and the Printing Department occupied 6,000 square feet of space in the same building. If janitorial costs for the building were $12,000, then the amount that the Copying Department would be allocated for janitorial services would be ________________. ________________________________________
36. Eliminating a department should eliminate all ____________________ expenses of the department. ________________________________________
Multiple Choice Questions
37. Which of the following is NOT a cost center? A. accounting department B. purchasing department C. shoe department D. research laboratory
38. Which of the following enables management to evaluate the performance of each business segment? A. responsibility accounting B. transfer pricing C. profit center costing D. cost center costing
39. Managerial accounting is generally utilized to provide financial information about all of the following except A. business segments. B. corporate headquarters. C. products. D. activities.
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Chapter 25 - Departmentalized Profit and Cost Centers
40. When a company has departmentalized profit and cost centers each of the following is reported separately except for A. Merchandise inventories. B. Sales. C. Purchases. D. General Office Expense.
41. Costs that cannot be directly assigned to a department, but are closely related to departmental activities are categorized as A. semidirect expenses. B. direct expenses. C. indirect expenses. D. general expenses.
42. Expenses that are closely related to a particular department and can easily be assigned to it during an accounting period are called A. operating expenses. B. indirect expenses. C. allocated expenses. D. direct expenses.
43. Floor space would be a reasonable basis for the allocation of A. rent expense for a building. B. sales revenue. C. payroll taxes expense. D. advertising expense.
44. An example of a direct expense in a department store is A. interest expense. B. sales salaries expense. C. rent expense for the building where the store is located. D. utilities expense.
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Chapter 25 - Departmentalized Profit and Cost Centers
45. In a store with several sales departments, departmentalized accounts would be used for A. sales only. B. sales, purchases, and merchandise inventory. C. sales and other income items only. D. all expense accounts.
46. A department probably would be considered for elimination if it had A. a positive contribution margin and a net income from operations. B. a positive contribution margin and a net loss from operations. C. a negative contribution margin and a net loss from operations. D. a net loss, regardless of the contribution margin.
47. The procedure for assigning indirect expenses to departments at the end of an accounting period is called A. valuation. B. amortization. C. allocation. D. distribution.
48. If a segment of business is considered a profit center A. it must sell products or services to customers outside the business. B. both revenue and cost data must be accumulated for the segment. C. no indirect expenses can be allocated to the segment. D. only revenue is accumulated for the segment.
49. The contribution margin of a department is the difference between A. its net sales and the total expenses. B. its net sales and its cost of goods sold. C. its gross profit on sales and its indirect expenses. D. its gross profit on sales and its direct expenses.
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Chapter 25 - Departmentalized Profit and Cost Centers
50. A transfer price is A. the price for which a company sells its products to customers. B. the price at which goods are moved from one department of a company to another department of the company. C. the basis on which indirect expenses are allocated. D. the price at which a company purchases its products from a supplier.
51. Department B had net sales of $70,000, gross profit on sales of $35,000, total direct expenses of $9,000, and total indirect expenses of $6,000. Department B's contribution margin is A. $20,000. B. $29,000. C. $26,000. D. $35,000.
52. Department B had net sales of $70,000, gross profit on sales of $35,000, total direct expenses of $9,000, and total indirect expenses of $6,000. Department B's net income is A. $20,000. B. $29,000. C. $26,000. D. $35,000.
53. Department A had total sales of $84,000 and Department B had total sales of $36,000. Other Office Expenses, totaling $2,500, are allocated on the basis of total sales. The amount allocated to Department B is A. $750. B. $1,750. C. $1,250. D. $1,071.
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Chapter 25 - Departmentalized Profit and Cost Centers
54. Department A had total sales of $84,000 and Department B had total sales of $36,000. Other Office Expenses, totaling $2,500, are allocated on the basis of total sales. The amount allocated to Department A is A. $750. B. $1,750. C. $1,250. D. $1,071.
Taylor and King, CPAs installed a new computer system. When the needs of the various divisions were analyzed, it was determined that the Audit Division would require 40% of the capacity, the Tax Division would require 25% of the capacity, and the Business Consulting Division would require 35% of the capacity. The computer system will cost $240,000.
55. How much of the computer system's cost will be allocated to the Tax Division? A. $96,000. B. $60,000. C. $84,000. D. $80,000.
56. How much of the computer system's cost will be allocated to the Business Consulting Division? A. $96,000. B. $60,000. C. $84,000. D. $80,000.
57. One department in a company had a contribution margin of $15,000 and a net loss from operations of $2,000. The indirect expenses allocated to this department would have been incurred whether or not the department existed. If this department had been eliminated, the company's reported net income would have been A. $2,000 higher. B. $15,000 lower. C. $13,000 lower. D. the same with or without the department.
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Chapter 25 - Departmentalized Profit and Cost Centers
58. Department XYZ had sales of $90,000, direct expenses of $60,000 and indirect expenses of $50,000. The indirect expenses allocated to this department would have been incurred whether or not the department existed. If this department had been eliminated, the company's reported net income would have been A. $20,000 higher. B. $30,000 higher. C. $20,000 lower. D. $30,000 lower.
59. The telephone expense is allocated on the basis of floor space. Department A occupies 1,875 square feet and Department B occupies 625 square feet. If the telephone expense is $600, the amount allocated to Department A is A. $150. B. $300. C. $450. D. $288.
60. Department A had gross profit on sales of $20,000, contribution margin of $12,000, total direct expenses of $8,000, and total indirect expenses of $7,000. Department A has A. a net income from operations of $5,000. B. a net income from operations of $4,000. C. a net loss from operations of $4,000. D. a net loss of $7,000.
61. The Whippleton Department had gross profit on sales of $120,000, contribution margin of $60,000, total direct expenses of $18,000, and total indirect expenses of $52,000. The Whippleton Department has A. a net income from operations of $42,000. B. a net income from operations of $8,000. C. a net income from operations of $50,000. D. a net loss from operations of $10,000.
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Chapter 25 - Departmentalized Profit and Cost Centers
62. Which of the following is usually not departmentalized? A. depreciation expense B. interest expense C. payroll taxes expense D. rent expense
63. Semidirect and indirect expenses are treated the same for accounting purposes. At the end of the accounting period they are A. recorded by the department they relate to. B. allocated. C. charged to headquarters (corporate) general expenses. D. treated as direct expenses.
64. Which of the following is NOT a limitation to using departmental operating income? A. It is difficult to determine each department's fair share of semidirect and indirect expenses. B. If one department is eliminated, many of the expenses allocated to it would continue. C. Managers rely more on contribution per department than on income from operations. D. It highlights the individual department's financial information.
65. Departmental income statements provide management with information necessary for decision-making. Which of the following is NOT a decision made possible by these statements? A. where improvements in the profitable departments are needed B. which departments to expand C. whether or not to eliminate a department D. what base to use to allocate costs
66. Prestige Corporation has Sales of $98,500, Indirect Expenses of $26,000, Direct Expenses of $62,400, and Cost of Goods Sold of $49,600. What is Prestige Corporation's Contribution Margin? A. $36,100 B. ($13,500) C. ($39,500) D. $48,900
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Chapter 25 - Departmentalized Profit and Cost Centers
67. McKay Corporation has Sales of $147,500, Cost of Goods Sold of $70,200, Direct Expenses of $35,300, and Indirect Expenses of $30,000. What is McKay Corporation's Contribution Margin? A. $77,300 B. $47,300 C. $42,000 D. $12,000
68. Cody Reese, manager of Cobra Sports, Ink, decided to eliminate its Division A. Division A had a contribution margin of $14,000 and a loss from operations of $2,500. What other information does Cody need to make the correct decision? A. which direct expenses will still be incurred B. the amount of Cost of Goods Sold C. the Gross Profit on Sales D. which of the indirect expenses will still be incurred
Short Answer Questions
69. City Shoe's insurance expense for the year totaled $6,300 and is to be allocated on the basis of the book value of inventory and equipment in each department. Using the financial data given below, compute the amount allocated to each department. Book value of inventory and equipment: (1) Women's Shoes, $79,800 (2) Men's Shoes, $69,300 (3) Children's Shoes, $60,900
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Chapter 25 - Departmentalized Profit and Cost Centers
70. City Shoe's custodial expense for the year totaled $7,000 and is to be allocated on the basis of the floor space occupied by each department. Using the financial data given below, compute the amount allocated to each department. Floor space occupied: (1) Women's Shoes, 6,615 sq. ft. (2) Men's Shoes, 5,145 sq. ft. (3) Children's Shoes, 2,940 sq. ft.
71. Shigley and Lothian, CPAs, allocate the expenses of the duplicating center to the Audit Department and the Tax Department, based on the number of copies that each department requests. During 2014, the Audit Department requested 80,000 copies and the Tax Department requested 120,000 copies. Total expenses of the duplicating center were $640,000 in 2014. How much of the duplicating center's expenses will be allocated to the Audit Department and the Tax Department?
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Chapter 25 - Departmentalized Profit and Cost Centers
72. Unit Manufacturing Company has a Northeast Division, a Central Division and a Southwest Division and a travel department which supports the employees in all three divisions. The $144,000 in travel department expenses is allocated to the divisions based on the number of reservations required by each of the divisions. If the Northeast Division requires 1,700 reservations and the Central Division requires 2,800 reservations, and the Southwest Division requires 3,500 reservations, calculate the amount of travel department costs that will be allocated to each of the divisions.
73. City Shoe's office expenses for the year totaled $63,000 and are to be allocated on the basis of the total sales of each department. Using the financial data given below compute the amount allocated to each department. Total sales: (1) Women's Shoes, $322,500 (2) Men's Shoes, $270,000 (3) Children's Shoes, $157,500
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Chapter 25 - Departmentalized Profit and Cost Centers
74. City Shoe's loss from uncollectible accounts is estimated to be one-half of 1 percent of net credit sales. Using the financial data given below, compute the amount allocated to each department. Credit sales: (1) Women's Shoes, $278,200 (2) Men's Shoes, $185,800 (3) Children's Shoes, $116,000 Sales returns and allowances (credit sales): (1) Women's Shoes, $2,200 (2) Men's Shoes, $1,800 (3) Children's Shoes, $1,000
75. Data related to the income and expenses of Moffet Company for the year ended December 31, 2013, are shown below. Use this information to prepare a departmental income statement showing contribution margin and net income of each department.
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Chapter 25 - Departmentalized Profit and Cost Centers
76. The departments of Cacophony Music Company are listed below. For each, determine whether it is a cost center or a profit center. ________ 1. Instrument Rental Department ________ 2. Instrument Repair Department ________ 3. Accounting Department ________ 4. Recording Studio ________ 5. Maintenance Department ________ 6. Sheet Music Department ________ 7. Storeroom ________ 8. Customer Service ________ 9. CDs and Tapes Department ________ 10. Purchasing & Receiving
77. Barista Coffee Shoppe and Store has two departments. The Store sells ground coffees, coffee beans, grinders, coffee makes, cappuccino machines, mugs, aprons, flavored additives, and flavored creamers. The Shoppe sells brewed coffees. Prepare the gross profit section of the Income Statement for Barista Coffee Shoppe and Store as of its yearend on June 30, 2013 using the information given. Include the proper heading.
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Chapter 25 - Departmentalized Profit and Cost Centers
78. Prepare the Operating Expenses section of the Income Statement for Sanjam Company at yearend, March 31, 2013. The Gross Profit for Sanjam Petit Fours is $36,500 and for Chocolates it is $102,350. (Hint: The first line of your partial Income Statement after the heading should be Operating Expenses, and the final line should be Total Indirect Expenses. Include Contribution Margin in its proper place.)
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Chapter 25 - Departmentalized Profit and Cost Centers
79. Complete the table of Uncollectible Accounts given below.
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Chapter 25 - Departmentalized Profit and Cost Centers
80. Examine the following partial Income Statement for Gemology Products and determine whether or not to close the Jewelry Department. If the Jewelry Department is closed, the Insurance Expense will be reduced by $500 and one office employee part time position will be eliminated. That position pays $6,500 a year. The other expenses will remain.
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Chapter 25 - Departmentalized Profit and Cost Centers
81. Fill in the blanks where indicated in the partial Income Statement that follows.
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Chapter 25 - Departmentalized Profit and Cost Centers
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Chapter 25 - Departmentalized Profit and Cost Centers
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Chapter 25 - Departmentalized Profit and Cost Centers
82. Using the information provided, determine and present in good form, the Operating Revenue section of the Income Statement for Cody's Conundrums.
83. Using the information provided, determine and present in good form, the Gross Profit section of the Income Statement for Cody's Conundrums.
84. Using the information provided, determine and present in good form, the Cost of Goods Sold section of the Income Statement for Cody's Conundrums.
85. Using the information provided, determine and present in good form, the Operating Expenses section of the Income Statement for Cody's Conundrums. Note: The last line item will be Total Indirect Expense.
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Chapter 25 - Departmentalized Profit and Cost Centers
Bamboozle Solutions has two departments, A and B. The total indirect expenses by category are given as are the Value of the Assets, Square Feet, and Sales for each department.
86. Based on the information given, determine the basis for the allocation (value of the assets Equipment and Inventory; square feet of space; or sales) of each expense that will be allocated to the departments.
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Chapter 25 - Departmentalized Profit and Cost Centers
87. Based on the information given, calculate the allocations for each of the indirect expenses given based on their logical basis. (Keep two decimals in every percent calculation (i. e., 25.65% or .2565 not 26%). Round final allocation amount to the nearest dollar.)
88. Joe's Haberdashery has two departments, Clothing and Accessories. The Sales Journal for Joe's is shown below. Fill in the missing numbers. What is the Sales Tax percent charged?
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Chapter 25 - Departmentalized Profit and Cost Centers
89. Moriah's Creations has two departments, Clothing and Fashion Accessories. The following charge sales were made during the month of September. The Sales tax is 7%. Complete the Sales Journal. Give a brief description of Lily Pad's purchase.
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Chapter 25 - Departmentalized Profit and Cost Centers
Matching Questions
90. Match the following terms with the definitions. 1. The process that allows management to evaluate the performance of each segment of the business and assign responsibility for its financial results 2. A business segment that produces revenue 3. The branch of accounting that provides financial information about business segments, activities, or products 4. Gross profit on sales minus direct expenses 5. The price at which one segment's goods are transferred to another segment of the company 6. Operating expenses that cannot be readily identified and are not closely related to activity within a department 7. Operating expenses that are identified directly with a department and are recorded by department 8. A business segment that incurs costs but does not produce revenue 9. Operating expenses that cannot be directly assigned to a department but are closely related to departmental activities 10. Income statement that shows each department's contribution margin and net income from operations after all expenses are allocated
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Indirect expenses ____ Profit center ____
Direct expenses ____ Profit center ____ Departmental income statement ____ Responsibility accounting ____ Cost center ____ Transfer price ____ Contribution margin ____ Semidirect expenses ____
Chapter 25 - Departmentalized Profit and Cost Centers
Chapter 25 Departmentalized Profit and Cost Centers Answer Key
True / False Questions
1. For accounting purposes, both revenue and cost data are accumulated for a profit center. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-01 Explain profit centers and cost centers. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
2. A company may have several cost centers, but it can have only one profit center. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-01 Explain profit centers and cost centers. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
3. In departmental accounting, any costs and expenses not directly related to a specific department are allocated to all departments. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-03 Explain and identify direct and indirect Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
25-29
Chapter 25 - Departmentalized Profit and Cost Centers
4. The amount of floor space occupied by each department is a common basis for allocating rent expense or utilities expense. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
5. Some indirect costs may be allocated on the basis of departmental sales in proportion to total sales. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
6. Management decisions involving the elimination of a department should be based on the contribution margin of the department. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 25-06 Use a departmental income statement in making decisions such as whether a department should be closed. Level: Easy Topic: Departmental Income Statements
7. Traditional financial statements may not contain adequate information for managing a business. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-06 Use a departmental income statement in making decisions such as whether a department should be closed. Level: Easy Topic: Departmental Income Statements
25-30
Chapter 25 - Departmentalized Profit and Cost Centers
8. Cost centers do not directly earn revenue. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-01 Explain profit centers and cost centers. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
9. The purchasing, information systems, and maintenance departments are examples of profit centers of a company. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-01 Explain profit centers and cost centers. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
10. Responsibility accounting provides detailed data for each cost center and profit center so that management can determine how efficiently the individual segments are functioning. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-01 Explain profit centers and cost centers. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
11. When a business is organized into separate departments, it is necessary to provide accounting information about each department. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-02 Prepare the gross profit section of a departmental income statement. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
25-31
Chapter 25 - Departmentalized Profit and Cost Centers
12. When a departmentalized income statement is to be prepared, the sales journal must be departmentalized. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-02 Prepare the gross profit section of a departmental income statement. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
13. Semidirect and indirect expenses are allocated to the sales department at the time the expenses are incurred. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-03 Explain and identify direct and indirect Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
14. Allocated expenses can be rounded to the nearest whole dollar on departmental income statements. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
15. Office expenses such as postage and stationery should be allocated on the basis of contribution margin of each department. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
25-32
Chapter 25 - Departmentalized Profit and Cost Centers
16. Office salaries expense should be allocated on the basis of total sales in each department. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
17. Nonoperating income, such as interest income, should be allocated on the basis of total sales in each department. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
18. Contribution margin is another name for gross profit. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Level: Easy Topic: Departmental Income Statements
19. A department that has a positive contribution margin is contributing something toward the net income of the business. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Level: Easy Topic: Departmental Income Statements
25-33
Chapter 25 - Departmentalized Profit and Cost Centers
20. The difficulty of fairly allocating direct expenses is one limitation of departmental income statements. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Level: Easy Topic: Departmental Income Statements
Fill in the Blank Questions
21. Departments that provide services to other departments of the firm are often organized as ____________________ centers. cost
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-01 Explain profit centers and cost centers. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
22. In departmental accounting, expenses that can be closely identified with an individual department are referred to as ____________________ expenses. direct
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-03 Explain and identify direct and indirect Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
25-34
Chapter 25 - Departmentalized Profit and Cost Centers
23. The difference between a department's gross profit on sales and its direct expenses is called ___________________. contribution margin
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Level: Easy Topic: Departmental Income Statements
24. Operating expenses that cannot be easily assigned to particular departments at the time transactions occur and are recorded are called ____________________ expenses. indirect
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-03 Explain and identify direct and indirect Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
25. A systematic and logical way to allocate the rent expense for a building to various sales departments would be on the basis of ___________________. floor space
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
25-35
Chapter 25 - Departmentalized Profit and Cost Centers
26. A department's ____________________ is usually more important than its net income or net loss when management is considering whether to close the department. contribution margin
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-06 Use a departmental income statement in making decisions such as whether a department should be closed. Level: Easy Topic: Departmental Income Statements
27. Eliminating a department that has a negative contribution margin would result in ____________________ net income for the company than if the department were not eliminated. higher; more
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 25-06 Use a departmental income statement in making decisions such as whether a department should be closed. Level: Easy Topic: Departmental Income Statements
28. If an attempt is made to identify and accumulate both revenue and cost data for a specific segment of a company, that segment is called a(n) ____________________ center. profit
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-01 Explain profit centers and cost centers. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
25-36
Chapter 25 - Departmentalized Profit and Cost Centers
29. The basic principle of ____________________ accounting is that management should be able to evaluate the performance of each segment of the business and pinpoint responsibility for its financial results. responsibility
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-01 Explain profit centers and cost centers. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
30. The price at which goods are moved from one segment of a company to another is the ____________________ price. transfer
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-01 Explain profit centers and cost centers. Learning Objective: 25-07 Define the accounting terms new to this chapter. Level: Easy Topic: Departmental Income Statements Topic: Profit and Cost Centers and Departmental Accounting
31. Expenses that are closely related to the activities in each department, but cannot be allocated to any specific department are called ____________________ expenses. semidirect
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-03 Explain and identify direct and indirect Learning Objective: 25-07 Define the accounting terms new to this chapter. Level: Easy Topic: Departmental Income Statements Topic: Profit and Cost Centers and Departmental Accounting
25-37
Chapter 25 - Departmentalized Profit and Cost Centers
32. The area of accounting that provides financial information about individual segments, activities, or products of a business is called ____________________ accounting. managerial
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-01 Explain profit centers and cost centers. Learning Objective: 25-07 Define the accounting terms new to this chapter. Level: Easy Topic: Departmental Income Statements Topic: Profit and Cost Centers and Departmental Accounting
33. A logical way to allocate janitorial wages to various departments would be on the basis of ___________________. floor space
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
34. Department A had total sales of $40,000 and Department B had total sales of $10,000. If office salaries expense is allocated on the basis of total sales, ____________________ percent would be used to determine the allocation for Department B. 20
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-38
Chapter 25 - Departmentalized Profit and Cost Centers
35. The Copying Department occupied 9,000 square feet of space and the Printing Department occupied 6,000 square feet of space in the same building. If janitorial costs for the building were $12,000, then the amount that the Copying Department would be allocated for janitorial services would be ________________. $7,200
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
36. Eliminating a department should eliminate all ____________________ expenses of the department. direct
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-06 Use a departmental income statement in making decisions such as whether a department should be closed. Level: Easy Topic: Departmental Income Statements
Multiple Choice Questions
37. Which of the following is NOT a cost center? A. accounting department B. purchasing department C. shoe department D. research laboratory
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 25-01 Explain profit centers and cost centers. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
25-39
Chapter 25 - Departmentalized Profit and Cost Centers
38. Which of the following enables management to evaluate the performance of each business segment? A. responsibility accounting B. transfer pricing C. profit center costing D. cost center costing
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 25-01 Explain profit centers and cost centers. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
39. Managerial accounting is generally utilized to provide financial information about all of the following except A. business segments. B. corporate headquarters. C. products. D. activities.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 25-01 Explain profit centers and cost centers. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
40. When a company has departmentalized profit and cost centers each of the following is reported separately except for A. Merchandise inventories. B. Sales. C. Purchases. D. General Office Expense.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 25-02 Prepare the gross profit section of a departmental income statement. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
25-40
Chapter 25 - Departmentalized Profit and Cost Centers
41. Costs that cannot be directly assigned to a department, but are closely related to departmental activities are categorized as A. semidirect expenses. B. direct expenses. C. indirect expenses. D. general expenses.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-03 Explain and identify direct and indirect Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
42. Expenses that are closely related to a particular department and can easily be assigned to it during an accounting period are called A. operating expenses. B. indirect expenses. C. allocated expenses. D. direct expenses.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-03 Explain and identify direct and indirect Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
43. Floor space would be a reasonable basis for the allocation of A. rent expense for a building. B. sales revenue. C. payroll taxes expense. D. advertising expense.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
25-41
Chapter 25 - Departmentalized Profit and Cost Centers
44. An example of a direct expense in a department store is A. interest expense. B. sales salaries expense. C. rent expense for the building where the store is located. D. utilities expense.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-03 Explain and identify direct and indirect Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
45. In a store with several sales departments, departmentalized accounts would be used for A. sales only. B. sales, purchases, and merchandise inventory. C. sales and other income items only. D. all expense accounts.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-02 Prepare the gross profit section of a departmental income statement. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
46. A department probably would be considered for elimination if it had A. a positive contribution margin and a net income from operations. B. a positive contribution margin and a net loss from operations. C. a negative contribution margin and a net loss from operations. D. a net loss, regardless of the contribution margin.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Learning Objective: 25-06 Use a departmental income statement in making decisions such as whether a department should be closed. Level: Easy Topic: Departmental Income Statements
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Chapter 25 - Departmentalized Profit and Cost Centers
47. The procedure for assigning indirect expenses to departments at the end of an accounting period is called A. valuation. B. amortization. C. allocation. D. distribution.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
48. If a segment of business is considered a profit center A. it must sell products or services to customers outside the business. B. both revenue and cost data must be accumulated for the segment. C. no indirect expenses can be allocated to the segment. D. only revenue is accumulated for the segment.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-01 Explain profit centers and cost centers. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
49. The contribution margin of a department is the difference between A. its net sales and the total expenses. B. its net sales and its cost of goods sold. C. its gross profit on sales and its indirect expenses. D. its gross profit on sales and its direct expenses.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Level: Easy Topic: Departmental Income Statements
25-43
Chapter 25 - Departmentalized Profit and Cost Centers
50. A transfer price is A. the price for which a company sells its products to customers. B. the price at which goods are moved from one department of a company to another department of the company. C. the basis on which indirect expenses are allocated. D. the price at which a company purchases its products from a supplier.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-01 Explain profit centers and cost centers. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
51. Department B had net sales of $70,000, gross profit on sales of $35,000, total direct expenses of $9,000, and total indirect expenses of $6,000. Department B's contribution margin is A. $20,000. B. $29,000. C. $26,000. D. $35,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Level: Medium Topic: Departmental Income Statements
52. Department B had net sales of $70,000, gross profit on sales of $35,000, total direct expenses of $9,000, and total indirect expenses of $6,000. Department B's net income is A. $20,000. B. $29,000. C. $26,000. D. $35,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Level: Medium Topic: Departmental Income Statements
25-44
Chapter 25 - Departmentalized Profit and Cost Centers
53. Department A had total sales of $84,000 and Department B had total sales of $36,000. Other Office Expenses, totaling $2,500, are allocated on the basis of total sales. The amount allocated to Department B is A. $750. B. $1,750. C. $1,250. D. $1,071.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
54. Department A had total sales of $84,000 and Department B had total sales of $36,000. Other Office Expenses, totaling $2,500, are allocated on the basis of total sales. The amount allocated to Department A is A. $750. B. $1,750. C. $1,250. D. $1,071.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
Taylor and King, CPAs installed a new computer system. When the needs of the various divisions were analyzed, it was determined that the Audit Division would require 40% of the capacity, the Tax Division would require 25% of the capacity, and the Business Consulting Division would require 35% of the capacity. The computer system will cost $240,000.
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Chapter 25 - Departmentalized Profit and Cost Centers
55. How much of the computer system's cost will be allocated to the Tax Division? A. $96,000. B. $60,000. C. $84,000. D. $80,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
56. How much of the computer system's cost will be allocated to the Business Consulting Division? A. $96,000. B. $60,000. C. $84,000. D. $80,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
57. One department in a company had a contribution margin of $15,000 and a net loss from operations of $2,000. The indirect expenses allocated to this department would have been incurred whether or not the department existed. If this department had been eliminated, the company's reported net income would have been A. $2,000 higher. B. $15,000 lower. C. $13,000 lower. D. the same with or without the department.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 25-06 Use a departmental income statement in making decisions such as whether a department should be closed. Level: Medium Topic: Departmental Income Statements
25-46
Chapter 25 - Departmentalized Profit and Cost Centers
58. Department XYZ had sales of $90,000, direct expenses of $60,000 and indirect expenses of $50,000. The indirect expenses allocated to this department would have been incurred whether or not the department existed. If this department had been eliminated, the company's reported net income would have been A. $20,000 higher. B. $30,000 higher. C. $20,000 lower. D. $30,000 lower.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 25-06 Use a departmental income statement in making decisions such as whether a department should be closed. Level: Medium Topic: Departmental Income Statements
59. The telephone expense is allocated on the basis of floor space. Department A occupies 1,875 square feet and Department B occupies 625 square feet. If the telephone expense is $600, the amount allocated to Department A is A. $150. B. $300. C. $450. D. $288.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-47
Chapter 25 - Departmentalized Profit and Cost Centers
60. Department A had gross profit on sales of $20,000, contribution margin of $12,000, total direct expenses of $8,000, and total indirect expenses of $7,000. Department A has A. a net income from operations of $5,000. B. a net income from operations of $4,000. C. a net loss from operations of $4,000. D. a net loss of $7,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Level: Medium Topic: Departmental Income Statements
61. The Whippleton Department had gross profit on sales of $120,000, contribution margin of $60,000, total direct expenses of $18,000, and total indirect expenses of $52,000. The Whippleton Department has A. a net income from operations of $42,000. B. a net income from operations of $8,000. C. a net income from operations of $50,000. D. a net loss from operations of $10,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Level: Medium Topic: Departmental Income Statements
62. Which of the following is usually not departmentalized? A. depreciation expense B. interest expense C. payroll taxes expense D. rent expense
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
25-48
Chapter 25 - Departmentalized Profit and Cost Centers
63. Semidirect and indirect expenses are treated the same for accounting purposes. At the end of the accounting period they are A. recorded by the department they relate to. B. allocated. C. charged to headquarters (corporate) general expenses. D. treated as direct expenses.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 25-03 Explain and identify direct and indirect Level: Easy Topic: Profit and Cost Centers and Departmental Accounting
64. Which of the following is NOT a limitation to using departmental operating income? A. It is difficult to determine each department's fair share of semidirect and indirect expenses. B. If one department is eliminated, many of the expenses allocated to it would continue. C. Managers rely more on contribution per department than on income from operations. D. It highlights the individual department's financial information.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Level: Medium Topic: Departmental Income Statements
65. Departmental income statements provide management with information necessary for decision-making. Which of the following is NOT a decision made possible by these statements? A. where improvements in the profitable departments are needed B. which departments to expand C. whether or not to eliminate a department D. what base to use to allocate costs
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 25-06 Use a departmental income statement in making decisions such as whether a department should be closed. Level: Easy Topic: Departmental Income Statements
25-49
Chapter 25 - Departmentalized Profit and Cost Centers
66. Prestige Corporation has Sales of $98,500, Indirect Expenses of $26,000, Direct Expenses of $62,400, and Cost of Goods Sold of $49,600. What is Prestige Corporation's Contribution Margin? A. $36,100 B. ($13,500) C. ($39,500) D. $48,900
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Level: Medium Topic: Departmental Income Statements
67. McKay Corporation has Sales of $147,500, Cost of Goods Sold of $70,200, Direct Expenses of $35,300, and Indirect Expenses of $30,000. What is McKay Corporation's Contribution Margin? A. $77,300 B. $47,300 C. $42,000 D. $12,000
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Level: Medium Topic: Departmental Income Statements
25-50
Chapter 25 - Departmentalized Profit and Cost Centers
68. Cody Reese, manager of Cobra Sports, Ink, decided to eliminate its Division A. Division A had a contribution margin of $14,000 and a loss from operations of $2,500. What other information does Cody need to make the correct decision? A. which direct expenses will still be incurred B. the amount of Cost of Goods Sold C. the Gross Profit on Sales D. which of the indirect expenses will still be incurred
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 25-06 Use a departmental income statement in making decisions such as whether a department should be closed. Level: Medium Topic: Departmental Income Statements
Short Answer Questions
69. City Shoe's insurance expense for the year totaled $6,300 and is to be allocated on the basis of the book value of inventory and equipment in each department. Using the financial data given below, compute the amount allocated to each department. Book value of inventory and equipment: (1) Women's Shoes, $79,800 (2) Men's Shoes, $69,300 (3) Children's Shoes, $60,900 1. $2,394; 2. $2,079; 3. $1,827
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-51
Chapter 25 - Departmentalized Profit and Cost Centers
70. City Shoe's custodial expense for the year totaled $7,000 and is to be allocated on the basis of the floor space occupied by each department. Using the financial data given below, compute the amount allocated to each department. Floor space occupied: (1) Women's Shoes, 6,615 sq. ft. (2) Men's Shoes, 5,145 sq. ft. (3) Children's Shoes, 2,940 sq. ft. 1. $3,150; 2. $2,450; 3. $1,400
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
71. Shigley and Lothian, CPAs, allocate the expenses of the duplicating center to the Audit Department and the Tax Department, based on the number of copies that each department requests. During 2014, the Audit Department requested 80,000 copies and the Tax Department requested 120,000 copies. Total expenses of the duplicating center were $640,000 in 2014. How much of the duplicating center's expenses will be allocated to the Audit Department and the Tax Department? Audit Department, $256,000; Tax Department, $384,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-52
Chapter 25 - Departmentalized Profit and Cost Centers
72. Unit Manufacturing Company has a Northeast Division, a Central Division and a Southwest Division and a travel department which supports the employees in all three divisions. The $144,000 in travel department expenses is allocated to the divisions based on the number of reservations required by each of the divisions. If the Northeast Division requires 1,700 reservations and the Central Division requires 2,800 reservations, and the Southwest Division requires 3,500 reservations, calculate the amount of travel department costs that will be allocated to each of the divisions. Northeast Division, $30,600; Central Division, $50,400; Southwest Division, $63,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
73. City Shoe's office expenses for the year totaled $63,000 and are to be allocated on the basis of the total sales of each department. Using the financial data given below compute the amount allocated to each department. Total sales: (1) Women's Shoes, $322,500 (2) Men's Shoes, $270,000 (3) Children's Shoes, $157,500 1. $27,090; 2. $22,680; 3. $13,230
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-53
Chapter 25 - Departmentalized Profit and Cost Centers
74. City Shoe's loss from uncollectible accounts is estimated to be one-half of 1 percent of net credit sales. Using the financial data given below, compute the amount allocated to each department. Credit sales: (1) Women's Shoes, $278,200 (2) Men's Shoes, $185,800 (3) Children's Shoes, $116,000 Sales returns and allowances (credit sales): (1) Women's Shoes, $2,200 (2) Men's Shoes, $1,800 (3) Children's Shoes, $1,000 1. $1,380; 2. $920; 3. $575
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-54
Chapter 25 - Departmentalized Profit and Cost Centers
75. Data related to the income and expenses of Moffet Company for the year ended December 31, 2013, are shown below. Use this information to prepare a departmental income statement showing contribution margin and net income of each department.
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Chapter 25 - Departmentalized Profit and Cost Centers
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Level: Medium Topic: Departmental Income Statements
76. The departments of Cacophony Music Company are listed below. For each, determine whether it is a cost center or a profit center. ________ 1. Instrument Rental Department ________ 2. Instrument Repair Department ________ 3. Accounting Department ________ 4. Recording Studio ________ 5. Maintenance Department ________ 6. Sheet Music Department ________ 7. Storeroom ________ 8. Customer Service ________ 9. CDs and Tapes Department ________ 10. Purchasing & Receiving (1) Profit, (2) Profit, (3) Cost, (4) Profit, (5) Cost, (6) Profit, (7) Cost, (8) Cost, (9) Profit, (10) Cost
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 25-01 Explain profit centers and cost centers. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-56
Chapter 25 - Departmentalized Profit and Cost Centers
77. Barista Coffee Shoppe and Store has two departments. The Store sells ground coffees, coffee beans, grinders, coffee makes, cappuccino machines, mugs, aprons, flavored additives, and flavored creamers. The Shoppe sells brewed coffees. Prepare the gross profit section of the Income Statement for Barista Coffee Shoppe and Store as of its yearend on June 30, 2013 using the information given. Include the proper heading.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 25-02 Prepare the gross profit section of a departmental income statement. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-57
Chapter 25 - Departmentalized Profit and Cost Centers
78. Prepare the Operating Expenses section of the Income Statement for Sanjam Company at yearend, March 31, 2013. The Gross Profit for Sanjam Petit Fours is $36,500 and for Chocolates it is $102,350. (Hint: The first line of your partial Income Statement after the heading should be Operating Expenses, and the final line should be Total Indirect Expenses. Include Contribution Margin in its proper place.)
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Chapter 25 - Departmentalized Profit and Cost Centers
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-03 Explain and identify direct and indirect Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-59
Chapter 25 - Departmentalized Profit and Cost Centers
79. Complete the table of Uncollectible Accounts given below.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-60
Chapter 25 - Departmentalized Profit and Cost Centers
80. Examine the following partial Income Statement for Gemology Products and determine whether or not to close the Jewelry Department. If the Jewelry Department is closed, the Insurance Expense will be reduced by $500 and one office employee part time position will be eliminated. That position pays $6,500 a year. The other expenses will remain.
The contribution margin for the Jewelry Department is $14,000, a positive number. It is the case that the department has a Net Loss of $2,360. However, this is due to allocations of indirect expenses, not all of which will disappear if the Jewelry Department is eliminated. The expenses that will no longer occur if the Jewelry Department is closed total $7,000. The contribution margin lost is more than the costs that will be saved. Therefore, the Jewelry Department should remain open.
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Chapter 25 - Departmentalized Profit and Cost Centers
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 25-06 Use a departmental income statement in making decisions such as whether a department should be closed. Level: Hard Topic: Departmental Income Statements
25-62
Chapter 25 - Departmentalized Profit and Cost Centers
81. Fill in the blanks where indicated in the partial Income Statement that follows.
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Chapter 25 - Departmentalized Profit and Cost Centers
25-64
Chapter 25 - Departmentalized Profit and Cost Centers
25-65
Chapter 25 - Departmentalized Profit and Cost Centers
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Level: Medium Topic: Departmental Income Statements
25-66
Chapter 25 - Departmentalized Profit and Cost Centers
25-67
Chapter 25 - Departmentalized Profit and Cost Centers
82. Using the information provided, determine and present in good form, the Operating Revenue section of the Income Statement for Cody's Conundrums.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-02 Prepare the gross profit section of a departmental income statement. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-68
Chapter 25 - Departmentalized Profit and Cost Centers
83. Using the information provided, determine and present in good form, the Gross Profit section of the Income Statement for Cody's Conundrums.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-02 Prepare the gross profit section of a departmental income statement. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-69
Chapter 25 - Departmentalized Profit and Cost Centers
84. Using the information provided, determine and present in good form, the Cost of Goods Sold section of the Income Statement for Cody's Conundrums.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-02 Prepare the gross profit section of a departmental income statement. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-70
Chapter 25 - Departmentalized Profit and Cost Centers
85. Using the information provided, determine and present in good form, the Operating Expenses section of the Income Statement for Cody's Conundrums. Note: The last line item will be Total Indirect Expense.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Level: Medium Topic: Departmental Income Statements
25-71
Chapter 25 - Departmentalized Profit and Cost Centers
Bamboozle Solutions has two departments, A and B. The total indirect expenses by category are given as are the Value of the Assets, Square Feet, and Sales for each department.
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Chapter 25 - Departmentalized Profit and Cost Centers
86. Based on the information given, determine the basis for the allocation (value of the assets Equipment and Inventory; square feet of space; or sales) of each expense that will be allocated to the departments.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
87. Based on the information given, calculate the allocations for each of the indirect expenses given based on their logical basis. (Keep two decimals in every percent calculation (i. e., 25.65% or .2565 not 26%). Round final allocation amount to the nearest dollar.)
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Chapter 25 - Departmentalized Profit and Cost Centers
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Chapter 25 - Departmentalized Profit and Cost Centers
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-75
Chapter 25 - Departmentalized Profit and Cost Centers
88. Joe's Haberdashery has two departments, Clothing and Accessories. The Sales Journal for Joe's is shown below. Fill in the missing numbers. What is the Sales Tax percent charged?
The sales tax percent is 7%. (i.e.,14.70/210.00)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-02 Prepare the gross profit section of a departmental income statement. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-76
Chapter 25 - Departmentalized Profit and Cost Centers
89. Moriah's Creations has two departments, Clothing and Fashion Accessories. The following charge sales were made during the month of September. The Sales tax is 7%. Complete the Sales Journal. Give a brief description of Lily Pad's purchase.
On September 13th, Lily Pad purchased $340.00 in merchandise from the Clothing Department and $160.00 from the Accessories Department and charged her purchases to her account. Her purchase was recorded on Sales Slip No. 518. Sales tax on this purchase amounted to $35.00.
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Chapter 25 - Departmentalized Profit and Cost Centers
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 25-02 Prepare the gross profit section of a departmental income statement. Level: Medium Topic: Profit and Cost Centers and Departmental Accounting
25-78
Chapter 25 - Departmentalized Profit and Cost Centers
Matching Questions
90. Match the following terms with the definitions. 1. The process that allows management to evaluate the performance of each segment of the business and assign responsibility for its financial results 2. A business segment that produces revenue 3. The branch of accounting that provides financial information about business segments, activities, or products 4. Gross profit on sales minus direct expenses 5. The price at which one segment's goods are transferred to another segment of the company 6. Operating expenses that cannot be readily identified and are not closely related to activity within a department 7. Operating expenses that are identified directly with a department and are recorded by department 8. A business segment that incurs costs but does not produce revenue 9. Operating expenses that cannot be directly assigned to a department but are closely related to departmental activities 10. Income statement that shows each department's contribution margin and net income from operations after all expenses are allocated
Indirect expenses 6 Profit center 3
Direct expenses 7 Profit center 2 Departmental income statement 10 Responsibility accounting 1 Cost center 8 Transfer price 5 Contribution margin 4 Semidirect expenses 9
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 25-01 Explain profit centers and cost centers. Learning Objective: 25-02 Prepare the gross profit section of a departmental income statement. Learning Objective: 25-03 Explain and identify direct and indirect Learning Objective: 25-04 Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department. Learning Objective: 25-05 Prepare a departmental income statement showing the contribution margin and operating income for each department. Learning Objective: 25-06 Use a departmental income statement in making decisions such as whether a department should be closed. Learning Objective: 25-07 Define the accounting terms new to this chapter. Level: Easy Topic: Departmental Income Statements Topic: Profit and Cost Centers and Departmental Accounting
25-79
Chapter 26 - Accounting for Manufacturing Activities
Chapter 26 Accounting for Manufacturing Activities True / False Questions
1. Raw Materials Used is not an element of manufacturing overhead. True False
2. The beginning and ending balances of the finished goods inventory are not used in the computation of cost of goods manufactured. True False
3. Amounts paid to factory repair and maintenance employees are considered direct labor. True False
4. Gross profit for a manufacturing business is computed by deducting cost of goods manufactured from net sales. True False
5. Cleaning materials and lubricants used in factory operations and maintenance are considered manufacturing overhead. True False
6. A statement of cost goods manufactured supports the income statement. True False
7. The Cost of Goods Sold section of the income statement for a manufacturing business shows the work in process inventory. True False
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Chapter 26 - Accounting for Manufacturing Activities
8. Products that are only partially completed are called work in process. True False
9. If the ending finished goods inventory is greater than the beginning finished goods inventory, the cost of goods sold will be higher than the cost of goods manufactured. True False
10. The raw materials inventory, the work in process inventory, and the finished goods inventory are all shown in the Current Assets section of the balance sheet. True False
11. The beginning inventory of raw materials is shown in the Income Statement Credit column and the Balance Sheet Debit column of a worksheet for a manufacturing business. True False
12. The adjusting entry to close out the beginning work in process inventory includes a debit to Income Summary and a credit to Work in Process Inventory. True False
13. Immediately before it is closed, the balance of the Manufacturing Summary account represents the cost of goods manufactured. True False
14. The balance of the Manufacturing Summary account is closed into the Income Summary account. True False
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Chapter 26 - Accounting for Manufacturing Activities
15. If there are no errors, the amount needed to balance the Cost of Goods Manufactured columns of a worksheet will also be the amount required to balance the Balance Sheet columns. True False
16. Information about depreciation, insurance, and property taxes for the factory building of a manufacturing business would be shown in the Operating Expenses section of the income statement. True False
17. The amounts of the raw materials used, direct labor, and manufacturing overhead for a fiscal period are reported on the statement of cost of goods manufactured. True False
18. In a manufacturing company, it is not necessary to take a physical inventory of the finished goods. True False
19. Six adjusting entries are made for inventory accounts in a manufacturing operation. True False
20. Reversing entries help save time and prevent errors in the period being closed. True False
Fill in the Blank Questions
21. All of the items that are purchased for manufacturing operations, that go into a product and become part of it, are called ____________________ materials. ________________________________________
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Chapter 26 - Accounting for Manufacturing Activities
22. The salary paid to a factory supervisor would be classified as ____________________ labor. ________________________________________
23. All manufacturing costs except those for direct labor and direct materials are included in manufacturing ___________________. ________________________________________
24. For a manufacturing business, net sales minus cost of goods ____________________ equals gross profit on sales. ________________________________________
25. Finished goods inventory is used in the computation of cost of goods ___________________. ________________________________________
26. The cost of indirect materials and supplies used in manufacturing operations would be included in the computation of total manufacturing costs as ________________________. ________________________________________
27. To compute the cost of goods ___________________, it is necessary to subtract the ending work in process inventory from the sum of the beginning work in process inventory and the total manufacturing cost. ________________________________________
28. As part of the adjusting entries, the beginning inventory of work in process is closed into the ____________________ Summary account. ________________________________________
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Chapter 26 - Accounting for Manufacturing Activities
29. The entry to close the Manufacturing Summary account includes a(n) ____________________ to Manufacturing Summary. ________________________________________
30. As part of the adjusting entries, the beginning inventory of finished goods is closed into the ____________________ Summary account. ________________________________________
31. The ending inventory of raw materials is shown on the worksheet of a manufacturing business in the Cost of Goods Manufactured ____________________ column. ________________________________________
32. On a worksheet for a manufacturing business, the beginning inventory of finished goods is extended to the ____________________ Debit column. ________________________________________
33. The Manufacturing Summary account is closed into the ____________________ account. ________________________________________
34. The beginning and ending ____________________ inventories appear in the Cost of Goods Sold section of the income statement of a manufacturing business. ________________________________________
35. The raw materials inventory is shown in the ____________________ section of the balance sheet of a manufacturing business. ________________________________________
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Chapter 26 - Accounting for Manufacturing Activities
Multiple Choice Questions
36. Under the perpetual inventory method, additions and deletions are recorded as they occur to which of the following? A. Finished Goods B. Work in Process C. Materials D. All of the above
37. Organizations that utilize the perpetual inventory method record additions and deletions A. daily. B. monthly. C. quarterly. D. yearly.
38. The Balance Sheet of a manufacturing firm will include which account that will not be included in the Balance Sheet of a service firm? A. Purchases B. Accounts Payable C. Prepaid Wages D. Work in Process Inventory
39. The end-of-period adjusting entries are A. recorded and posted in the ledger. B. recorded in the journal and posted in the ledger. C. recorded in the ledger and posted in the journal. D. recorded and posted in the journal.
40. Closing entries for a manufacturing firm include all of the following except A. transferring all manufacturing cost accounts to Manufacturing Summary. B. transferring all Revenue and Expense account balances to Income Summary. C. closing Manufacturing Summary to Income Summary. D. closing Income Summary to Net Income.
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Chapter 26 - Accounting for Manufacturing Activities
41. Which of the following is NOT an adjusting entry? A. B. C. D.
42. Once the financial statements have been prepared, the steps in the accounting cycle are complete. Which of the following is NOT one of the steps in the accounting cycle? A. Adjusting entries B. Closing Trial Balance C. Post Closing Trial Balance D. Closing entries
43. Wages paid to the factory maintenance and repair personnel of a manufacturing business are shown A. in the Operating Expenses section of the income statement. B. as Direct Labor on the statement of cost goods manufactured. C. as part of Manufacturing Overhead on the statement cost of goods manufactured. D. as a part of the Cost of Goods Sold section of the income statement.
44. The manufacturing costs incurred during the year are A. shown by the expense accounts such as Wages Expense and Utilities Expense that are listed in the Operating Expenses section of the income statement. B. shown as Direct Labor, Raw Materials, and Manufacturing Overhead in the Operating Expenses section of the income statement. C. used in the computation of cost of goods manufactured. D. shown in the Cost of Goods Sold section of the income statement.
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Chapter 26 - Accounting for Manufacturing Activities
45. The cost of goods manufactured is computed by A. adding raw materials used and direct labor to manufacturing overhead. B. deducting the ending work in process inventory from the sum of the total manufacturing cost and the beginning work in process inventory. C. deducting the ending finished goods inventory from the beginning finished goods inventory. D. adding operating expenses to direct labor costs.
46. Indirect labor for a manufacturing business includes the wages of A. factory repair and maintenance employees. B. employees who assemble the product. C. employees who sell the product. D. office employees.
47. Gross profit for a manufacturing business is computed by A. deducting cost of goods sold from net sales. B. deducting cost of goods manufactured from net sales. C. deducting the ending finished goods inventory from the total goods available for sale. D. deducting operating expenses from the costs of goods sold.
48. The three components of total manufacturing cost are A. cost of goods manufactured, cost of goods sold, and work in process. B. raw materials used, direct labor, and manufacturing overhead. C. selling expenses, administrative expenses, and manufacturing overhead. D. raw materials used, direct labor, and cost of goods sold.
49. The statement of cost of goods manufactured A. supports the income statement. B. replaces the income statement. C. is not related to the income statement. D. supports the balance sheet.
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Chapter 26 - Accounting for Manufacturing Activities
50. On the completed worksheet of a manufacturing business, the accounts related to materials purchases, direct labor, and factory overhead A. appear in the Income Statement section. B. do not appear. C. appear in the Balance Sheet section. D. appear in the Cost of Goods Manufactured section.
51. The cost of goods manufactured for a fiscal period is reported on A. both the statement of cost of goods manufactured and the income statement. B. both the statement of the cost of goods manufactured and the balance sheet. C. both the income statement and the balance sheet. D. the statement of cost of goods manufactured only.
52. The balance sheet of a manufacturing business shows A. the finished goods inventory and the cost of goods manufactured. B. the cost of goods manufactured rather than inventory figures. C. a single inventory figure—the amount of the finished goods inventory. D. the raw materials inventory, the work in process inventory, and the finished goods inventory.
53. The ending balance of the work in process inventory is recorded by debiting Work in Process Inventory and crediting A. Income Summary. B. Cost of Goods Sold. C. Manufacturing Summary. D. Merchandise Inventory.
54. In adjusting entries for a manufacturing business, the beginning balance of the work in process inventory is eliminated by crediting Work in Process Inventory and debiting A. Finished Goods Inventory. B. Manufacturing Summary. C. Income Summary. D. Merchandise Inventory.
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Chapter 26 - Accounting for Manufacturing Activities
55. The Indirect Labor account is closed by crediting it and debiting A. Wages Payable. B. Income Summary. C. Manufacturing Summary. D. Wages Expense.
56. On a worksheet for a manufacturing firm, the beginning balance of the Finished Goods Inventory account should A. be extended to the Cost of Goods Manufactured Debit column. B. be extended to the Income Statement Debit column. C. be extended to the Balance Sheet Debit column. D. not be listed.
57. The balance of the Manufacturing Summary account is closed into A. Income Summary. B. Cost of Goods Manufactured. C. Retained Earnings. D. Manufacturing Overhead.
58. Reversing entries for a manufacturing business are A. made prior to preparing the postclosing trial balance. B. made for the inventory accounts only. C. closed into the Manufacturing Summary account. D. made for accrual adjustments.
59. Reversing entries are required by A. the Internal Revenue Service. B. Generally Accepted Accounting Principles. C. the International Accounting Standards Board. D. none of the above.
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Chapter 26 - Accounting for Manufacturing Activities
60. All manufacturing costs that are NOT classified as direct materials or direct labor are A. indirect materials. B. indirect labor. C. manufacturing overhead. D. semidirect costs.
61. The following information appears on the income statement of the Richer Company at the end of the year.
Cost of Goods Manufactured was: A. $246,000. B. $280,000. C. $264,000. D. $240,000.
62. The following information appears on the income statement of the Richer Company at the end of the year.
Gross Profit on Sales was: A. $140,000. B. $160,000. C. $200,000. D. $220,000.
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Chapter 26 - Accounting for Manufacturing Activities
63. The following information appears on the income statement of the Davis Company at the end of the year.
Ending finished goods inventory was: A. $140,000. B. $160,000. C. $200,000. D. $220,000.
64. The following information appears on the Statement of Cost of Goods Manufactured for the Coleman Company at the end of the year.
The cost for Direct Labor was: A. $40,000. B. $60,000. C. $110,000. D. $120,000.
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Chapter 26 - Accounting for Manufacturing Activities
65. The following information appears on the Statement of Cost of Goods Manufactured for the Coleman Company at the end of the year.
The balance in Work in Process Inventory at year-end was: A. $30,000. B. $40,000. C. $60,000. D. $20,000.
66. The following information appears on the Statement of Cost of Goods Manufactured for the Ethridge Company at the end of the year.
Cost of Goods Manufactured for the year was: A. $200,000. B. $210,000. C. $220,000. D. $240,000.
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Chapter 26 - Accounting for Manufacturing Activities
67. The following information appears on the Statement of Cost of Goods Manufactured for the Poster Company at the end of the year.
Manufacturing Overhead for the year was: A. $60,000. B. $50,000. C. $40,000. D. $30,000.
Short Answer Questions
68. Stellar Manufacturing had a beginning raw materials inventory of $220,000. The firm had net purchases of $625,000 for the period and an ending raw materials inventory of $199,000. What was the cost of raw materials used?
69. Bolton Company's total manufacturing cost for the year was $1,785,000. The firm's manufacturing overhead was $315,000, and its cost of raw materials used was $842,000. What was the direct labor cost for the year?
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Chapter 26 - Accounting for Manufacturing Activities
70. Calculate the Cost of Goods Manufactured.
71. Calculate net income for the year.
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Chapter 26 - Accounting for Manufacturing Activities
72. Selected account balances for Reed Manufacturing Company on December 31, 2013, the end of the fiscal year, are given below. Data about the beginning and ending inventories are also given. Use this information to prepare a statement of cost of goods manufactured and an income statement for 2013.
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Chapter 26 - Accounting for Manufacturing Activities
73. Selected account balances for Reed Manufacturing Company on December 31, 2013, the end of the fiscal year, are given below. Data about the beginning and ending inventories are also given. Record the adjusting entries for the inventory accounts on page 5 of a general journal. Skip a line and record the entry to close the manufacturing cost accounts. Omit descriptions.
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Chapter 26 - Accounting for Manufacturing Activities
74. The accounts and the Adjusted Trial Balance section of Spencer Manufacturing's worksheet are given below.
Instructions: (1) Enter the account names in the Account Name column and the adjusted trial balance in the Adjusted Trial Balance columns of a 12-column manufacturing worksheet. Or use a 10column worksheet and use the last four columns, changing the column headings as needed. (2) Extend the balances to the appropriate columns and complete the worksheet for the year ended December 31, 2013. (3) Record the closing entries for all revenue and expense accounts and the Manufacturing Summary account on page 9 of a general journal. Omit descriptions.
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Chapter 26 - Accounting for Manufacturing Activities
75. The above listed items are used by Paige Manufacturing to make dollhouses. Categorize each as Direct Materials (DM), Direct Labor (DL), or Manufacturing Overhead (MOH).
76. From the information given, determine total direct and total indirect costs.
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Chapter 26 - Accounting for Manufacturing Activities
77. Define the term manufacturing overhead and give three examples of manufacturing overhead for a bakery.
78. Using only the relevant items from the information given, determine the total product cost for Donnybrook Corporation, a manufacturer of children's furniture. All materials purchased were used in inventory during the current period. There was no beginning inventory.
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Chapter 26 - Accounting for Manufacturing Activities
79. What are the three inventory accounts for a manufacturing firm? List the three inventory accounts and indicate for each the name(s) of the statement(s) in which it appears.
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Chapter 26 - Accounting for Manufacturing Activities
80. Fill in the missing line items on the Statement of Cost of Goods Manufactured given. Include correct indentations, underlines, dates, and capitalization when needed.
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Chapter 26 - Accounting for Manufacturing Activities
81. Fill in the missing line items on the Statement of Cost of Goods Manufactured given. Include correct indentations, underlines, dates, and capitalization when needed.
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Chapter 26 - Accounting for Manufacturing Activities
82. Fill in the missing line items on the Income Statement given. Include correct indentations, underlines, dates, and capitalization when needed.
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Chapter 26 - Accounting for Manufacturing Activities
83. Fill in the missing line items on the Income Statement given. Include correct indentations, underlines, dates, and capitalization when needed.
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Chapter 26 - Accounting for Manufacturing Activities
The Balance Sheet headings and the accounts and their balances for Exemplar Manufacturing are listed in alphabetical order. Exemplar Manufacturing has a fiscal year end of June 30, 2013.
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Chapter 26 - Accounting for Manufacturing Activities
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Chapter 26 - Accounting for Manufacturing Activities
84. Using the information given, prepare the Current Assets section of the Balance Sheet for Exemplar Manufacturing. Include correct indentations, underlines, dates, and capitalization where needed.
85. Using the information given, prepare the Balance Sheet for Exemplar Manufacturing. Include correct indentations, underlines, dates, and capitalization where needed.
86. Describe the process for adjusting entries for inventory in a manufacturing firm. How many adjustments are made for inventory? To what account are the adjustments to inventory made?
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Chapter 26 - Accounting for Manufacturing Activities
87. Other than the adjusting entries that are made to Manufacturing Summary and to Income Summary for inventory, there are several adjustments that are normally made. List at least three and discuss why they are made and what accounts are affected.
88. What is the postclosing Trial Balance and why is it prepared?
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Chapter 26 - Accounting for Manufacturing Activities
Matching Questions
89. Match the following terms with the definitions provided. 1. The account to which all items on the statement of cost of goods manufactured are closed 2. A financial report showing details of the cost of goods completed for a manufacturing business 3. The materials placed into production 4. Partially completed units in the production process 5. All manufacturing costs that are not classified as direct materials or direct labor 6. Materials used in manufacturing a product that do not become a part of the product 7. All items that go into a product and become a part of it 8. Costs attributable to personnel who support production but are not directly involved in the manufacture of a product; for example, supervisory, repair and maintenance, and janitorial staff 9. The cost of completed products ready for sale; corresponds to the Merchandise Inventory account of a merchandising business 10. The costs attributable to personnel who work directly on the product being manufactured
26-30
Indirect Labor ____ Finished Goods Inventory ____ Raw Materials ____ Work in Process ____ Direct Labor ____ Direct Materials ____ Indirect Materials and Supplies ____
Manufacturing Overhead ____ Statement of Cost of Goods Manufactured ____ Manufacturing Summary Account ____
Chapter 26 - Accounting for Manufacturing Activities
Chapter 26 Accounting for Manufacturing Activities Answer Key
True / False Questions
1. Raw Materials Used is not an element of manufacturing overhead. TRUE
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
2. The beginning and ending balances of the finished goods inventory are not used in the computation of cost of goods manufactured. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-01 Prepare a statement of cost of goods manufactured. Learning Objective: 26-03 Prepare an income statement for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
3. Amounts paid to factory repair and maintenance employees are considered direct labor. FALSE
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
4. Gross profit for a manufacturing business is computed by deducting cost of goods manufactured from net sales. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-03 Prepare an income statement for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
5. Cleaning materials and lubricants used in factory operations and maintenance are considered manufacturing overhead. TRUE
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
6. A statement of cost goods manufactured supports the income statement. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-01 Prepare a statement of cost of goods manufactured. Level: Easy Topic: Accounting for Manufacturing Costs
7. The Cost of Goods Sold section of the income statement for a manufacturing business shows the work in process inventory. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
26-32
Chapter 26 - Accounting for Manufacturing Activities
8. Products that are only partially completed are called work in process. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
9. If the ending finished goods inventory is greater than the beginning finished goods inventory, the cost of goods sold will be higher than the cost of goods manufactured. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-03 Prepare an income statement for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
10. The raw materials inventory, the work in process inventory, and the finished goods inventory are all shown in the Current Assets section of the balance sheet. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-04 Prepare a balance sheet for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
11. The beginning inventory of raw materials is shown in the Income Statement Credit column and the Balance Sheet Debit column of a worksheet for a manufacturing business. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-05 Prepare a worksheet for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
26-33
Chapter 26 - Accounting for Manufacturing Activities
12. The adjusting entry to close out the beginning work in process inventory includes a debit to Income Summary and a credit to Work in Process Inventory. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-05 Prepare a worksheet for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
13. Immediately before it is closed, the balance of the Manufacturing Summary account represents the cost of goods manufactured. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-07 Record closing entries for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
14. The balance of the Manufacturing Summary account is closed into the Income Summary account. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-07 Record closing entries for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
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Chapter 26 - Accounting for Manufacturing Activities
15. If there are no errors, the amount needed to balance the Cost of Goods Manufactured columns of a worksheet will also be the amount required to balance the Balance Sheet columns. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-05 Prepare a worksheet for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
16. Information about depreciation, insurance, and property taxes for the factory building of a manufacturing business would be shown in the Operating Expenses section of the income statement. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
17. The amounts of the raw materials used, direct labor, and manufacturing overhead for a fiscal period are reported on the statement of cost of goods manufactured. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
26-35
Chapter 26 - Accounting for Manufacturing Activities
18. In a manufacturing company, it is not necessary to take a physical inventory of the finished goods. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-04 Prepare a balance sheet for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
19. Six adjusting entries are made for inventory accounts in a manufacturing operation. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-05 Prepare a worksheet for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
20. Reversing entries help save time and prevent errors in the period being closed. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-08 Record reversing entries for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
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Chapter 26 - Accounting for Manufacturing Activities
Fill in the Blank Questions
21. All of the items that are purchased for manufacturing operations, that go into a product and become part of it, are called ____________________ materials. direct
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
22. The salary paid to a factory supervisor would be classified as ____________________ labor. indirect
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
23. All manufacturing costs except those for direct labor and direct materials are included in manufacturing ___________________. overhead
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
26-37
Chapter 26 - Accounting for Manufacturing Activities
24. For a manufacturing business, net sales minus cost of goods ____________________ equals gross profit on sales. sold
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-03 Prepare an income statement for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
25. Finished goods inventory is used in the computation of cost of goods ___________________. sold
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-03 Prepare an income statement for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
26. The cost of indirect materials and supplies used in manufacturing operations would be included in the computation of total manufacturing costs as ________________________. manufacturing overhead
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
26-38
Chapter 26 - Accounting for Manufacturing Activities
27. To compute the cost of goods ___________________, it is necessary to subtract the ending work in process inventory from the sum of the beginning work in process inventory and the total manufacturing cost. manufactured
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
28. As part of the adjusting entries, the beginning inventory of work in process is closed into the ____________________ Summary account. Manufacturing
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-05 Prepare a worksheet for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
29. The entry to close the Manufacturing Summary account includes a(n) ____________________ to Manufacturing Summary. credit
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-07 Record closing entries for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
26-39
Chapter 26 - Accounting for Manufacturing Activities
30. As part of the adjusting entries, the beginning inventory of finished goods is closed into the ____________________ Summary account. Income
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-05 Prepare a worksheet for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
31. The ending inventory of raw materials is shown on the worksheet of a manufacturing business in the Cost of Goods Manufactured ____________________ column. Credit
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-05 Prepare a worksheet for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
32. On a worksheet for a manufacturing business, the beginning inventory of finished goods is extended to the ____________________ Debit column. income statement
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-05 Prepare a worksheet for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
33. The Manufacturing Summary account is closed into the ____________________ account. Income Summary
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-07 Record closing entries for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
26-40
Chapter 26 - Accounting for Manufacturing Activities
34. The beginning and ending ____________________ inventories appear in the Cost of Goods Sold section of the income statement of a manufacturing business. finished goods
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-03 Prepare an income statement for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
35. The raw materials inventory is shown in the ____________________ section of the balance sheet of a manufacturing business. Current Assets
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-04 Prepare a balance sheet for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
Multiple Choice Questions
36. Under the perpetual inventory method, additions and deletions are recorded as they occur to which of the following? A. Finished Goods B. Work in Process C. Materials D. All of the above
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-04 Prepare a balance sheet for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
26-41
Chapter 26 - Accounting for Manufacturing Activities
37. Organizations that utilize the perpetual inventory method record additions and deletions A. daily. B. monthly. C. quarterly. D. yearly.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 26-04 Prepare a balance sheet for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
38. The Balance Sheet of a manufacturing firm will include which account that will not be included in the Balance Sheet of a service firm? A. Purchases B. Accounts Payable C. Prepaid Wages D. Work in Process Inventory
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-04 Prepare a balance sheet for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
39. The end-of-period adjusting entries are A. recorded and posted in the ledger. B. recorded in the journal and posted in the ledger. C. recorded in the ledger and posted in the journal. D. recorded and posted in the journal.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-06 Record the end-of-period adjusting entries for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
26-42
Chapter 26 - Accounting for Manufacturing Activities
40. Closing entries for a manufacturing firm include all of the following except A. transferring all manufacturing cost accounts to Manufacturing Summary. B. transferring all Revenue and Expense account balances to Income Summary. C. closing Manufacturing Summary to Income Summary. D. closing Income Summary to Net Income.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-06 Record the end-of-period adjusting entries for a manufacturing business. Level: Medium Topic: Completing the Accounting Cycle
41. Which of the following is NOT an adjusting entry? A. B. C. D.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-06 Record the end-of-period adjusting entries for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
42. Once the financial statements have been prepared, the steps in the accounting cycle are complete. Which of the following is NOT one of the steps in the accounting cycle? A. Adjusting entries B. Closing Trial Balance C. Post Closing Trial Balance D. Closing entries
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-06 Record the end-of-period adjusting entries for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
26-43
Chapter 26 - Accounting for Manufacturing Activities
43. Wages paid to the factory maintenance and repair personnel of a manufacturing business are shown A. in the Operating Expenses section of the income statement. B. as Direct Labor on the statement of cost goods manufactured. C. as part of Manufacturing Overhead on the statement cost of goods manufactured. D. as a part of the Cost of Goods Sold section of the income statement.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
44. The manufacturing costs incurred during the year are A. shown by the expense accounts such as Wages Expense and Utilities Expense that are listed in the Operating Expenses section of the income statement. B. shown as Direct Labor, Raw Materials, and Manufacturing Overhead in the Operating Expenses section of the income statement. C. used in the computation of cost of goods manufactured. D. shown in the Cost of Goods Sold section of the income statement.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-01 Prepare a statement of cost of goods manufactured. Level: Easy Topic: Accounting for Manufacturing Costs
45. The cost of goods manufactured is computed by A. adding raw materials used and direct labor to manufacturing overhead. B. deducting the ending work in process inventory from the sum of the total manufacturing cost and the beginning work in process inventory. C. deducting the ending finished goods inventory from the beginning finished goods inventory. D. adding operating expenses to direct labor costs.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
26-44
Chapter 26 - Accounting for Manufacturing Activities
46. Indirect labor for a manufacturing business includes the wages of A. factory repair and maintenance employees. B. employees who assemble the product. C. employees who sell the product. D. office employees.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
47. Gross profit for a manufacturing business is computed by A. deducting cost of goods sold from net sales. B. deducting cost of goods manufactured from net sales. C. deducting the ending finished goods inventory from the total goods available for sale. D. deducting operating expenses from the costs of goods sold.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-03 Prepare an income statement for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
48. The three components of total manufacturing cost are A. cost of goods manufactured, cost of goods sold, and work in process. B. raw materials used, direct labor, and manufacturing overhead. C. selling expenses, administrative expenses, and manufacturing overhead. D. raw materials used, direct labor, and cost of goods sold.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
49. The statement of cost of goods manufactured A. supports the income statement. B. replaces the income statement. C. is not related to the income statement. D. supports the balance sheet.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-03 Prepare an income statement for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
50. On the completed worksheet of a manufacturing business, the accounts related to materials purchases, direct labor, and factory overhead A. appear in the Income Statement section. B. do not appear. C. appear in the Balance Sheet section. D. appear in the Cost of Goods Manufactured section.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-05 Prepare a worksheet for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
51. The cost of goods manufactured for a fiscal period is reported on A. both the statement of cost of goods manufactured and the income statement. B. both the statement of the cost of goods manufactured and the balance sheet. C. both the income statement and the balance sheet. D. the statement of cost of goods manufactured only.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-03 Prepare an income statement for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
52. The balance sheet of a manufacturing business shows A. the finished goods inventory and the cost of goods manufactured. B. the cost of goods manufactured rather than inventory figures. C. a single inventory figure—the amount of the finished goods inventory. D. the raw materials inventory, the work in process inventory, and the finished goods inventory.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-04 Prepare a balance sheet for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
53. The ending balance of the work in process inventory is recorded by debiting Work in Process Inventory and crediting A. Income Summary. B. Cost of Goods Sold. C. Manufacturing Summary. D. Merchandise Inventory.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-05 Prepare a worksheet for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
54. In adjusting entries for a manufacturing business, the beginning balance of the work in process inventory is eliminated by crediting Work in Process Inventory and debiting A. Finished Goods Inventory. B. Manufacturing Summary. C. Income Summary. D. Merchandise Inventory.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-05 Prepare a worksheet for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
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Chapter 26 - Accounting for Manufacturing Activities
55. The Indirect Labor account is closed by crediting it and debiting A. Wages Payable. B. Income Summary. C. Manufacturing Summary. D. Wages Expense.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-05 Prepare a worksheet for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
56. On a worksheet for a manufacturing firm, the beginning balance of the Finished Goods Inventory account should A. be extended to the Cost of Goods Manufactured Debit column. B. be extended to the Income Statement Debit column. C. be extended to the Balance Sheet Debit column. D. not be listed.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-05 Prepare a worksheet for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
57. The balance of the Manufacturing Summary account is closed into A. Income Summary. B. Cost of Goods Manufactured. C. Retained Earnings. D. Manufacturing Overhead.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-07 Record closing entries for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
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Chapter 26 - Accounting for Manufacturing Activities
58. Reversing entries for a manufacturing business are A. made prior to preparing the postclosing trial balance. B. made for the inventory accounts only. C. closed into the Manufacturing Summary account. D. made for accrual adjustments.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-08 Record reversing entries for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
59. Reversing entries are required by A. the Internal Revenue Service. B. Generally Accepted Accounting Principles. C. the International Accounting Standards Board. D. none of the above.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-08 Record reversing entries for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
60. All manufacturing costs that are NOT classified as direct materials or direct labor are A. indirect materials. B. indirect labor. C. manufacturing overhead. D. semidirect costs.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Easy Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
61. The following information appears on the income statement of the Richer Company at the end of the year.
Cost of Goods Manufactured was: A. $246,000. B. $280,000. C. $264,000. D. $240,000.
Cost of Goods Sold = 400,000 - 120,000 = 280,000. Cost of Goods Manufactured = 144,000 + 280,000 - 160,000 = 264,000. AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 26-01 Prepare a statement of cost of goods manufactured. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
62. The following information appears on the income statement of the Richer Company at the end of the year.
Gross Profit on Sales was: A. $140,000. B. $160,000. C. $200,000. D. $220,000.
Cost of Goods Sold = 200,000 + 120,000 - 180,000 = 140,000. Gross Profit = 360,000 - 140,000 = 220,000. AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 26-01 Prepare a statement of cost of goods manufactured. Learning Objective: 26-03 Prepare an income statement for a manufacturing business. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
63. The following information appears on the income statement of the Davis Company at the end of the year.
Ending finished goods inventory was: A. $140,000. B. $160,000. C. $200,000. D. $220,000.
Cost of Goods Sold = 500,000 - 160,000 = 340,000. Ending finished goods inventory = 120,000 + 360,000 - 340,000 = 140,000. AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 26-01 Prepare a statement of cost of goods manufactured. Learning Objective: 26-03 Prepare an income statement for a manufacturing business. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
64. The following information appears on the Statement of Cost of Goods Manufactured for the Coleman Company at the end of the year.
The cost for Direct Labor was: A. $40,000. B. $60,000. C. $110,000. D. $120,000. Direct Labor = Total Manufacturing Costs - Raw Material Used - Manufacturing Overhead = 170,000 - 50,000 - 60,000 = 60,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
65. The following information appears on the Statement of Cost of Goods Manufactured for the Coleman Company at the end of the year.
The balance in Work in Process Inventory at year-end was: A. $30,000. B. $40,000. C. $60,000. D. $20,000. Ending Work in Process Inventory = 10,000 + 170,000 - 150,000 = 30,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
66. The following information appears on the Statement of Cost of Goods Manufactured for the Ethridge Company at the end of the year.
Cost of Goods Manufactured for the year was: A. $200,000. B. $210,000. C. $220,000. D. $240,000.
Total Manufacturing Costs = Raw Material Used + Direct Labor + Manufacturing Overhead = 70,000 + 90,000 + 60,000 = 220,000. Cost of Goods Manufactured = 20,000 + 220,000 - 30,000 = 210,000. AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
67. The following information appears on the Statement of Cost of Goods Manufactured for the Poster Company at the end of the year.
Manufacturing Overhead for the year was: A. $60,000. B. $50,000. C. $40,000. D. $30,000. Manufacturing Cost = Ending Work in Process + Costs of Goods Manufacturing - Beginning Work in Process = 20,000 + 200,000 - 30,000 = 190,000. Overhead = Total Manufacturing Costs - Raw Material Used - Direct Labor = 190,000 - 70,000 - 90,000 = 30,000.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
Short Answer Questions
68. Stellar Manufacturing had a beginning raw materials inventory of $220,000. The firm had net purchases of $625,000 for the period and an ending raw materials inventory of $199,000. What was the cost of raw materials used? $646,000 Feedback: Material used = 220,000 + 625,000 - 199,000 = 646,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 26-01 Prepare a statement of cost of goods manufactured. Level: Medium Topic: Accounting for Manufacturing Costs
69. Bolton Company's total manufacturing cost for the year was $1,785,000. The firm's manufacturing overhead was $315,000, and its cost of raw materials used was $842,000. What was the direct labor cost for the year? $628,000 Feedback: Direct labor = 1,785,000 - 315,000 - 842,000 = 628,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 26-01 Prepare a statement of cost of goods manufactured. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
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Chapter 26 - Accounting for Manufacturing Activities
70. Calculate the Cost of Goods Manufactured.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 26-01 Prepare a statement of cost of goods manufactured. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
71. Calculate net income for the year.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 26-03 Prepare an income statement for a manufacturing business. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
72. Selected account balances for Reed Manufacturing Company on December 31, 2013, the end of the fiscal year, are given below. Data about the beginning and ending inventories are also given. Use this information to prepare a statement of cost of goods manufactured and an income statement for 2013.
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Chapter 26 - Accounting for Manufacturing Activities
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Chapter 26 - Accounting for Manufacturing Activities
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 26-01 Prepare a statement of cost of goods manufactured. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
73. Selected account balances for Reed Manufacturing Company on December 31, 2013, the end of the fiscal year, are given below. Data about the beginning and ending inventories are also given. Record the adjusting entries for the inventory accounts on page 5 of a general journal. Skip a line and record the entry to close the manufacturing cost accounts. Omit descriptions.
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Chapter 26 - Accounting for Manufacturing Activities
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 26-06 Record the end-of-period adjusting entries for a manufacturing business. Learning Objective: 26-07 Record closing entries for a manufacturing business. Level: Medium Topic: Completing the Accounting Cycle
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Chapter 26 - Accounting for Manufacturing Activities
74. The accounts and the Adjusted Trial Balance section of Spencer Manufacturing's worksheet are given below.
Instructions: (1) Enter the account names in the Account Name column and the adjusted trial balance in the Adjusted Trial Balance columns of a 12-column manufacturing worksheet. Or use a 10column worksheet and use the last four columns, changing the column headings as needed. (2) Extend the balances to the appropriate columns and complete the worksheet for the year ended December 31, 2013. (3) Record the closing entries for all revenue and expense accounts and the Manufacturing Summary account on page 9 of a general journal. Omit descriptions.
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Chapter 26 - Accounting for Manufacturing Activities
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Chapter 26 - Accounting for Manufacturing Activities
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Chapter 26 - Accounting for Manufacturing Activities
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 26-05 Prepare a worksheet for a manufacturing business. Learning Objective: 26-07 Record closing entries for a manufacturing business. Level: Medium Topic: Completing the Accounting Cycle
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Chapter 26 - Accounting for Manufacturing Activities
75. The above listed items are used by Paige Manufacturing to make dollhouses. Categorize each as Direct Materials (DM), Direct Labor (DL), or Manufacturing Overhead (MOH). 1. DM; 2. MOH; 3. DM; 4. DM; 5. DL; 6. MOH; 7. MOH; 8. MOH; 9. MOH; 10. MOH
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Medium Topic: Accounting for Manufacturing Costs
76. From the information given, determine total direct and total indirect costs. Direct costs = $3,022; Indirect costs = $2,889
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
77. Define the term manufacturing overhead and give three examples of manufacturing overhead for a bakery. Manufacturing overhead includes all manufacturing costs that are not classified as direct materials or direct labor. Examples for a bakery would be depreciation expense on the ovens, utilities, the spray or oil used to grease the pans prior to baking, depreciation on the baking equipment, cleaning supplies, supervisor salary, janitorial salaries, and taxes—both payroll and property. (Students' answers will vary. There may be plausible items listed in student answers that are not in the above list.)
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Medium Topic: Accounting for Manufacturing Costs
78. Using only the relevant items from the information given, determine the total product cost for Donnybrook Corporation, a manufacturer of children's furniture. All materials purchased were used in inventory during the current period. There was no beginning inventory.
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Chapter 26 - Accounting for Manufacturing Activities
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
79. What are the three inventory accounts for a manufacturing firm? List the three inventory accounts and indicate for each the name(s) of the statement(s) in which it appears.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 26-03 Prepare an income statement for a manufacturing business. Level: Easy Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
80. Fill in the missing line items on the Statement of Cost of Goods Manufactured given. Include correct indentations, underlines, dates, and capitalization when needed.
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Chapter 26 - Accounting for Manufacturing Activities
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
81. Fill in the missing line items on the Statement of Cost of Goods Manufactured given. Include correct indentations, underlines, dates, and capitalization when needed.
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Chapter 26 - Accounting for Manufacturing Activities
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
82. Fill in the missing line items on the Income Statement given. Include correct indentations, underlines, dates, and capitalization when needed.
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Chapter 26 - Accounting for Manufacturing Activities
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
83. Fill in the missing line items on the Income Statement given. Include correct indentations, underlines, dates, and capitalization when needed.
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Chapter 26 - Accounting for Manufacturing Activities
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 26-02 Explain the basic components of manufacturing cost. Level: Medium Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
The Balance Sheet headings and the accounts and their balances for Exemplar Manufacturing are listed in alphabetical order. Exemplar Manufacturing has a fiscal year end of June 30, 2013.
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Chapter 26 - Accounting for Manufacturing Activities
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Chapter 26 - Accounting for Manufacturing Activities
84. Using the information given, prepare the Current Assets section of the Balance Sheet for Exemplar Manufacturing. Include correct indentations, underlines, dates, and capitalization where needed.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 26-04 Prepare a balance sheet for a manufacturing business. Level: Hard Topic: Accounting for Manufacturing Costs
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Chapter 26 - Accounting for Manufacturing Activities
85. Using the information given, prepare the Balance Sheet for Exemplar Manufacturing. Include correct indentations, underlines, dates, and capitalization where needed.
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Chapter 26 - Accounting for Manufacturing Activities
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Chapter 26 - Accounting for Manufacturing Activities
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Create Learning Objective: 26-04 Prepare a balance sheet for a manufacturing business. Level: Hard Topic: Accounting for Manufacturing Costs
86. Describe the process for adjusting entries for inventory in a manufacturing firm. How many adjustments are made for inventory? To what account are the adjustments to inventory made? There are six adjustments made for inventory. Raw Materials Inventory and Work in Process Inventory are credited for beginning inventory accounts and debited for the ending inventory amounts. The adjustment for these two accounts is made to Manufacturing Summary. The Finished Goods Inventory account also has to be adjusted. However, when it is credited to Income Summary for its beginning inventory amount and debited for its ending balance amount.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 26-05 Prepare a worksheet for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
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Chapter 26 - Accounting for Manufacturing Activities
87. Other than the adjusting entries that are made to Manufacturing Summary and to Income Summary for inventory, there are several adjustments that are normally made. List at least three and discuss why they are made and what accounts are affected. (1.) There is usually an adjustment to the Allowance for Doubtful Accounts due to the estimate of expected nonpayment by customers. Whether this account is debited or credited depends on the balance in the account prior to the adjustment. Administrative Expense is the other account adjusted. (2.) The Prepaid Insurance account also usually has to be adjusted as the balance is affected by the passage of time. The Prepaid Insurance account is usually credited to reduce the balance and an Insurance Expense account is debited. (3.) The Supplies on Hand account usually needs to be adjusted to its current balance. It is normally credited and Supplies Expense or Manufacturing Overhead (Indirect Materials) is debited. (4.) The Depreciation Expense for each depreciable asset must be recorded. In each case, the respective Accumulated Depreciation account is credited. (5.) Any Salaries and Wages Expense that hasn't been recorded needs to be put on the books in order to match the expenses for the period to the revenues they helped create. The proper expense account is debited and Salaries and Wages Payable is credited. (6.) In conjunction with the Salaries and Wages Expense is the adjustment to accrue the Payroll Taxes—Factory and the Payroll Taxes Payable. (7.) The last adjustment is for any Income Taxes due. The debit is to Income Tax Expense and the credit is to Income Taxes Payable.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 26-06 Record the end-of-period adjusting entries for a manufacturing business. Level: Hard Topic: Completing the Accounting Cycle
88. What is the postclosing Trial Balance and why is it prepared? The postclosing Trial Balance is prepared to prove that the adjusting and closing entries were posted correctly. The general ledger account balance should agree to the balances for those accounts on the Balance Sheet. AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 26-07 Record closing entries for a manufacturing business. Level: Easy Topic: Completing the Accounting Cycle
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Chapter 26 - Accounting for Manufacturing Activities
Matching Questions
89. Match the following terms with the definitions provided. 1. The account to which all items on the statement of cost of goods manufactured are closed 2. A financial report showing details of the cost of goods completed for a manufacturing business 3. The materials placed into production 4. Partially completed units in the production process 5. All manufacturing costs that are not classified as direct materials or direct labor 6. Materials used in manufacturing a product that do not become a part of the product 7. All items that go into a product and become a part of it 8. Costs attributable to personnel who support production but are not directly involved in the manufacture of a product; for example, supervisory, repair and maintenance, and janitorial staff 9. The cost of completed products ready for sale; corresponds to the Merchandise Inventory account of a merchandising business 10. The costs attributable to personnel who work directly on the product being manufactured AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 26-09 Define the accounting terms new to this chapter. Level: Easy Topic: Completing the Accounting Cycle
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Indirect Labor 8 Finished Goods Inventory 9 Raw Materials 3 Work in Process 4 Direct Labor 10 Direct Materials 7 Indirect Materials and Supplies 6
Manufacturing Overhead 5 Statement of Cost of Goods Manufactured 2 Manufacturing Summary Account 1
Chapter 27 - Job Order Cost Accounting
Chapter 27 Job Order Cost Accounting True / False Questions
1. There is no need to take a physical count of inventory periodically when the perpetual inventory system is used. True False
2. Standard cost accounting may be used with either a job order cost system or a process cost system. True False
3. In a job order cost system, the entry to record the labor costs for a period includes a debit to Work in Process Inventory for direct labor and a debit to Manufacturing Overhead for indirect labor. True False
4. The manufacturing overhead recorded in the Work in Process Inventory account is not necessarily the actual overhead incurred. True False
5. The monthly total of the Overhead Applied section of all job order cost sheets should agree with the balance in the control account Manufacturing Overhead. True False
6. The entry to charge work in process inventory with the appropriate amount of applied overhead consists of a debit to Work in Process Inventory and a credit to Manufacturing Overhead Applied. True False
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Chapter 27 - Job Order Cost Accounting
7. When a perpetual inventory system is used, the balance of the Raw Materials Inventory account at the end of an accounting period should reflect the cost of materials on hand. True False
8. When perpetual inventories are maintained in a job order cost system, as each job is completed its cost is transferred from Work in Process Inventory to Finished Goods Inventory. True False
9. At the end of each year, the underapplied or overapplied overhead usually is closed out to the Cost of Goods Sold account. True False
10. Purchases of raw materials are debited to the Work in Process Inventory account. True False
11. Under the LIFO method of inventory pricing, the quantities issued are priced from the oldest inventory items available in the order they were received. True False
12. There is no need for a raw materials inventory account when a just-in-time inventory system is used. True False
13. Idle time is generally charged to manufacturing overhead. True False
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Chapter 27 - Job Order Cost Accounting
14. If a firm estimates that for the coming year it will have expected total direct labor costs of $60,000 and total manufacturing overhead costs of $36,000, its overhead application rate will be 60 percent. True False
15. At the end of the month, if the total of the credits in the Manufacturing Overhead Applied account is greater than the total of the debits in the Manufacturing Overhead account, overhead has been underapplied. True False
Fill in the Blank Questions
16. A(n) ____________________ cost accounting system is normally used when standard types of products are made in continuous operations. ________________________________________
17. A(n) ____________________ cost accounting system permits a firm to compare what its costs should be with its actual costs in order to evaluate efficiency. ________________________________________
18. The entry to record applied overhead includes a(n) ____________________ to Manufacturing Overhead Applied. ________________________________________
19. Indirect labor is recorded by debiting the _________________________ account. ________________________________________
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Chapter 27 - Job Order Cost Accounting
20. The entry to record applied overhead includes a(n) ____________________ to the Work in Process Inventory account. ________________________________________
21. The _________________________ rate is often computed by dividing estimated overhead costs by estimated direct labor costs. ________________________________________
22. If actual overhead costs exceed the overhead applied during the year, the difference represents ____________________ overhead. ________________________________________
23. Under a perpetual inventory system, when goods are completed the Work in Process Inventory account is ___________________. ________________________________________
24. Under a perpetual inventory system, when goods are sold the Cost of Goods Sold account is ___________________. ________________________________________
25. In a just-in-time inventory system, the _________________________ account is debited when goods arrive. ________________________________________
26. Under a job order cost system, unit costs are determined for products manufactured under each ___________________. ________________________________________
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Chapter 27 - Job Order Cost Accounting
27. When a cost accounting system is used, perpetual inventory records are kept for raw materials, work in process, and ___________________. ________________________________________
28. In a perpetual inventory system, each inventory account is supported by a(n) ____________________ ledger. ________________________________________
29. Materials may be withdrawn from the storeroom only on completion of a materials ___________________. ________________________________________
30. Workers who perform direct labor prepare a series of ____________________ to account for all time spent in the plant. ________________________________________
Multiple Choice Questions
31. When perpetual inventories are maintained in a job order cost system, the balance of the Work in Process Inventory account represents A. the actual costs incurred for labor, materials, and overhead on all jobs that were started but are not yet complete. B. the actual costs for the labor and materials used in uncompleted jobs and estimate of the overhead associated with these jobs. C. only the actual costs for the labor and materials used in uncompleted jobs. D. only the actual costs for the labor and materials used in completed jobs.
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Chapter 27 - Job Order Cost Accounting
32. A standard cost system may be used A. only with a process cost system. B. only with a job order cost system. C. with either a job order cost system or a process cost system. D. in neither a job order cost system or a process cost system.
33. When indirect materials are requisitioned from the materials storeroom and placed in production, an entry is made crediting Raw Materials Inventory and debiting A. Work in Process Inventory. B. Cost of Goods Manufactured. C. Manufacturing Overhead Applied. D. Manufacturing Overhead.
34. Actual overhead costs are A. debited to Work in Process Inventory when incurred. B. debited to Manufacturing Overhead when incurred. C. debited to Manufacturing Overhead Applied when incurred. D. credited to Manufacturing Overhead when incurred.
35. The entry to record the application of overhead to jobs consists of A. a debit to Manufacturing Overhead Applied and a credit to Manufacturing Overhead. B. a debit to Manufacturing Overhead and a credit to Manufacturing Overhead Applied. C. a debit to Work in Process Inventory and a credit to Manufacturing Overhead Applied. D. a debit to Manufacturing Overhead Applied and a credit to Work in Process Inventory.
36. At the end of the fiscal year, any overapplied or underapplied overhead is A. transferred to the Cost of Goods Sold account in an adjustment. B. shown on the balance sheet as either a deferred charge or a deferred credit. C. allocated to Cost of Goods Sold, Finished Goods Inventory, and Work in Process Inventory. D. transferred to the Cost of Goods Manufactured account in an adjustment.
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Chapter 27 - Job Order Cost Accounting
37. Job order cost accounting is appropriate A. when there are continuous operations on standard types of products. B. when a company produces more than one product in batches rather than on a continuous basis. C. only for goods produced on special order. D. for all manufacturing companies.
38. When a perpetual inventory system is used, sales revenue is recorded as products are sold, A. but the cost of the goods sold is not recorded. B. and the cost of the goods sold is transferred from the Finished Goods Inventory account to the Cost of Goods Sold account. C. and the cost of the goods sold is transferred from the Work in Process Inventory account to the Cost of Goods Sold account. D. and the cost of goods sold is transferred from the Cost of Goods Manufactured to the Cost of Goods Sold account.
39. When materials that will become part of a finished product are removed from the storeroom and placed in production, A. Work in Process Inventory is debited. B. Manufacturing Overhead is debited. C. Raw Materials Inventory is debited. D. Work in Process Inventory is credited.
40. A job order cost sheet summarizes A. the direct labor, direct materials used, and actual overhead costs incurred on a specific job. B. the direct labor, direct materials used, and applied overhead association with a specific job. C. the estimated costs that will be required to complete a specific job. D. the direct labor and direct materials used only.
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Chapter 27 - Job Order Cost Accounting
41. A firm purchased 25 units of materials with a unit price of $2.00 on May 5. On May 15, the firm purchased 25 units with a unit price of $2.10. If the firm uses the FIFO method of inventory pricing, the total cost of 30 units issued on May 20 would be A. $62.50. B. $60.00. C. $63.00. D. $60.50.
42. A firm purchased 25 units of materials with a unit price of $2.00 on May 5. On May 15, the firm purchased 25 units with a unit price of $2.10. If the firm uses the LIFO method of inventory pricing, the total cost of 30 units issued on May 20 would be A. $62.50. B. $60.00. C. $63.00. D. $60.50.
43. A firm purchased 50 units of materials with a unit price of $1.30 on June 1. On June 15, the firm purchased 50 units with a unit price of $1.20. If the firm uses the LIFO method of inventory pricing, the total cost of 65 units issued on June 20 would be A. $83.00. B. $79.50. C. $78.00. D. $84.50.
44. A firm purchased 50 units of materials with a unit price of $1.30 on June 1. On June 15, the firm purchased 50 units with a unit price of $1.20. If the firm uses the FIFO method of inventory pricing, the total cost of 65 units issued on June 20 would be A. $83.00. B. $79.50. C. $78.00. D. $84.50.
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Chapter 27 - Job Order Cost Accounting
45. A raw material subsidiary ledger A. contains a raw materials card for each item of direct materials only. B. contains a raw materials card for each item of indirect materials only. C. contains a raw materials card for each item of direct materials and indirect materials. D. contains a raw material card for each supplier of raw materials.
46. Job order cost sheets constitute a subsidiary ledger that supports A. the Work in Process Inventory account. B. the Finished Goods Inventory account. C. the Raw Materials Inventory account. D. the Cost of Goods Manufactured account.
47. Process cost accounting is appropriate A. exclusively for companies that produce only one product. B. when a company produces more that one product in batches rather than on a continuous basis. C. when a company produces what each customer wants on special order. D. when there are continuous operations on standard types of products.
48. The total direct labor charged to all job cost sheets must agree with the direct labor debited to A. Time Tickets. B. Wages Payable. C. Work in Process Inventory. D. Wages Expense.
49. What is the subsidiary ledger that contains a record for each overhead item called? A. Manufacturing Overhead Control B. Manufacturing Overhead Ledger C. Manufacturing Overhead Records Book D. Manufacturing Overhead Card
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Chapter 27 - Job Order Cost Accounting
50. Manufacturing overhead includes all of the following except A. indirect labor. B. direct labor. C. utilities. D. payroll taxes on factory labor.
51. The ______ is a record of all manufacturing costs charged to a specific job. A. Cost of Goods Sold B. Standard Costs Card C. Work in Process Inventory D. Job Order Cost Sheet
52. If the manufacturing overhead was overapplied, then A. the manufacturing overhead account had more debits than credits. B. the manufacturing overhead account had more credits than debits. C. the actual overhead expenses were more than the amount going to Work in Process. D. the debits to Work in Process were more than the credits to Work in Process.
53. The McGreen Company employees worked 10,000 hours last year with an average hourly rate of $11 per hour. The overhead was $495,000. If overhead is based on direct labor costs, then the overhead rate is ________ per direct labor dollar. A. $11.00 B. $49.50 C. $4.50 D. $4.95
54. If manufacturing overhead is applied at a rate of $1.50 per direct labor dollar and the Department B worker had worked 200 hours at $12 an hour on Job L1147, then the applied overhead would be A. $3,600. B. $18. C. $300. D. $2,400.
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Chapter 27 - Job Order Cost Accounting
55. Martinez Manufacturing applies overhead based on direct labor hours. The company estimates that their overhead for the year will be $180,000, and that they will use 72,000 direct labor hours. Martinez Manufacturing actually used 75,000 direct labor hours. The journal entry to record manufacturing overhead would include a: A. Debit to Work in Process Inventory for $187,500. B. Credit to Manufacturing Overhead Applied for $180,000. C. Debit to Work in Process Inventory for $180,000. D. Debit to Manufacturing Overhead Applied for $187,500.
56. Martinez Manufacturing applies overhead based on direct labor hours. The company estimates that their overhead for the year will be $180,000, and that they will use 72,000 direct labor hours. During the year, Martinez Manufacturing actually used 75,000 direct labor hours and actual overhead costs were $190,000. At the end of the year, manufacturing overhead was: A. Overapplied by $2,500. B. Overapplied by $10,000. C. Underapplied by $2,500. D. Underapplied by $10,000.
57. Wilson Enterprises applies overhead based on direct labor cost. The company estimates that their overhead for the year will be $240,000, and direct labor cost to be $300,000. Actual direct labor cost for Martinez Manufacturing was $280,000. The journal entry to record manufacturing overhead would include a: A. Debit to Work in Process Inventory for $240,000. B. Credit to Manufacturing Overhead Applied for $350,000. C. Credit to Work in Process Inventory for $224,000. D. Credit to Manufacturing Overhead Applied for $224,000.
58. Wilson Enterprises applies overhead based on direct labor cost. The company estimates that their overhead for the year will be $240,000, and direct labor cost to be $300,000. Actual direct labor cost for Martinez Manufacturing was $280,000 and actual overhead costs were $220,000. At the end of the year, manufacturing overhead was: A. Overapplied by $20,000. B. Underapplied by $20,000. C. Overapplied by $4,000. D. Underapplied by $4,000.
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Chapter 27 - Job Order Cost Accounting
59. At the end of the year the Manufacturing Overhead account is closed into what account? A. Work in Process B. Finished Goods C. Cost of Goods Sold D. Manufacturing Overhead Control
60. At the end of the year, Harding Company had a balance in Manufacturing Overhead of $19,000, and a balance in Manufacturing Overhead Applied of $20,000. When the Manufacturing Overhead account is closed, the Cost of Goods Sold account will be: A. Increased by $1,000. B. Decreased by $1,000. C. Unaffected. D. Closed to Manufacturing Overhead Applied.
61. At the end of the year, Easton Company had a balance in Manufacturing Overhead of $20,000, and a balance in Manufacturing Overhead Applied of $19,000. When the Manufacturing Overhead account is closed, the Cost of Goods Sold account will be: A. Increased by $1,000. B. Decreased by $1,000. C. Unaffected. D. Closed to Manufacturing Overhead Applied.
62. How often are direct labor costs entered on the Job Order Cost Sheets? A. Daily B. Weekly C. Monthly D. Immediately—as time cards are completed
63. What form is presented at the storeroom to obtain materials or supplies? A. Materials Request Form B. Materials Requisition Form C. Raw Materials Ledger Card D. Production Order Form
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Chapter 27 - Job Order Cost Accounting
Short Answer Questions
64. Millenium Manufacturing is considering two methods for applying overhead. Estimated data for the next year, 2013, follows.
1. What would be the overhead application rate based on direct labor costs? 2. What would be the overhead application rate based on direct labor hours? 3. If a job requires 650 hours of direct labor, what would be the amount of overhead applied to the job using the rate based on direct labor hours?
65. During the year, a firm's direct labor costs were $95,000. The firm applies overhead at the rate of 75 percent of direct labor costs. The firm's actual overhead costs for the year were $72,315. 1. What was the amount of overhead applied? 2. Did the firm have overapplied or underapplied overhead for the year? 3. What amount was overapplied or underapplied?
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Chapter 27 - Job Order Cost Accounting
66. During the year, a firm's direct labor costs were $115,000. The firm applies overhead at the rate of 80 percent of direct labor costs. The firm's actual overhead costs for the year were $90,665. 1. What was the amount of overhead applied? 2. Did the firm have overapplied or underapplied overhead for the year? 3. What amount was overapplied or underapplied?
67. During the year, Job EH-02 for 500 units was begun and completed. Costs entered on the job order cost sheet for this job were $15,400 for materials and $6,500 for labor. The firm applies overhead at the rate of 75 percent of direct labor costs. 1. What is the amount of overhead that should be applied to the job? 2. What is the total cost of the job? 3. What is the unit cost of the units produced?
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Chapter 27 - Job Order Cost Accounting
The cost data for the Omega Manufacturing Company for the month of April 2013 is given below. (a.) Raw materials and supplies costing $34,000 were purchased. (b.) The summary of materials requisitions shows that materials and supplies costing $30,900 were issued for use in jobs. Direct materials accounted for $28,000, and the balance consisted of indirect materials and supplies. (c.) The payroll summary shows that direct labor costs were $15,000 and indirect labor costs were $3,000. Social security tax withheld was $1,116, Medicare tax withheld was $261, and income tax deductions were $1,550. (d.) Manufacturing overhead of $6,200 was incurred in addition to indirect materials and indirect labor (credit Accounts Payable). (e.) The predetermined overhead application rate is 75 percent of direct labor costs. (f.) The summary of completed jobs shows that the cost of these jobs amounted to $39,600. (g.) The summary of sales invoices shows that goods costing $32,000 were sold on credit for $51,000.
68. Record the necessary entries on page 8 of a general journal. Omit descriptions.
69. Prepare a partial income statement for the month. Adjust the cost of goods sold for the amount of any overapplied or underapplied overhead.
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Chapter 27 - Job Order Cost Accounting
70. Every job includes some idle time that is usually handled in one of two ways. What are they and under what circumstances is each utilized?
71. What are the two principle cost accounting systems and give an example of a type of business which would use this system?
72. List the four manufacturing operations and define each. For the second operation, Production, summarize the flow of costs through a job order cost accounting system.
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Chapter 27 - Job Order Cost Accounting
73. Fill in the blanks for each of the following. (Blanks are indicated by numbers in parentheses.)
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Chapter 27 - Job Order Cost Accounting
74. Briefly describe a Just-in-Time (JIT) system. List the advantages and disadvantages of a JIT system.
75. Morion Hat Manufacturing made the following charge purchases on February 4 of the current year. Felt $5,687; Ribbon $1,234; Straw $6,723; Dye (for the straw) $39; Thread $47; Various plastic fruits, flowers, etc. $179; and Glue $28. Assume that all items purchased were requisitioned for production during the year. Complete one journal entry for all purchases and one summary journal entry dated February 20 for the requisitioning of those materials into production. Also, explain the internal controls applied to safeguard raw materials.
76. What form is used to keep track of inventory of raw materials? What additional information does the form provide if a perpetual inventory system is utilized?
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Chapter 27 - Job Order Cost Accounting
77. The Manufacturing Overhead Applied account for Djos Domal Company had activity of $567 in indirect materials and supplies, $785 in indirect labor, and $3,455 in other overhead costs recorded in the account at August 31 of the current year. The Manufacturing Overhead Applied account had a total of $4,600 in overhead applied during August. What is the over-or underapplied overhead for August? Prepare the journal entry to close the related overhead accounts.
78. The Manufacturing Overhead Applied account for Cullverin Manufacturing had activity of $860 in indirect materials and supplies, $992 in indirect labor, and $4,654 in other overhead costs recorded in the account at April 30 of the current year. The Manufacturing Overhead Applied account had a total of $6,740 in overhead applied during April. What is the over-or underapplied overhead for April? Prepare the journal entry to close the related overhead accounts.
Davit Boat Building has three jobs in process in November of the current year, A1-13, R18-4, and B2-19. All three were begun on November 1st. Job A1-13 was completed on November 21st with total labor costs of $8,750 and total material costs of $7,725. No other jobs were completed in November. The total balance in Job R18-4 is $3,275 ($675 in materials and $2,600 in labor) and in Job B2-19 is $6,782 ($1,240 in materials and $5,542 in labor) before overhead is applied. Overhead is applied based on total direct labor dollars. Estimated total direct labor dollars for the year is $245,000 and total estimated manufacturing overhead is $367,500.
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Chapter 27 - Job Order Cost Accounting
79. Based on the information given: 1. Determine the overhead rate for Davit Boat Building; 2. Prepare the journal entry to apply manufacturing overhead to manufacturing process for the month of November; 3. Determine the balance in the Work in Process account.
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Chapter 27 - Job Order Cost Accounting
80. Based on the information given, complete the Job Order Cost Sheet for Job A1-13.
Adams Manufacturing has three jobs in process in October of the current year, B2-19, C3-19, and D4-4. All three were begun during the first week of October. Job C3-19 was completed on October 10th with total labor costs of $14,750 and total material costs of $8,855. No other jobs were completed in October. The total balance in Job D4-4 is $8,250 ($4,275 in materials and $3,975 in labor) and in Job B2-19 is $17,850 ($10,425 in materials and $7,425 in labor) before overhead is applied. Overhead is applied based on total direct labor dollars. Estimated total direct labor dollars for the year is $440,000 and total estimated manufacturing overhead is $352,000.
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Chapter 27 - Job Order Cost Accounting
81. Based on the information given: 1. Determine the overhead rate for Adams Manufacturing; 2. Prepare the journal entry to apply manufacturing overhead to manufacturing process for the month of October; 3. Determine the balance in the Work in Process account at the end of October.
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Chapter 27 - Job Order Cost Accounting
82. Based on the information given, complete the Job Order Cost Sheet for Job C3-19.
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Chapter 27 - Job Order Cost Accounting
Matching Questions
83. Match the following definitions with the correct term from the list provided. 1. A measure of what costs should be in an efficient operation 2. Form used to record hours worked and jobs performed 3. A record showing details of receipts and issues for a type of raw material 4. A form that describes the item and quantity needed and shows the job or purpose 5. A cost accounting system that determines the unit cost of manufactured items for each separate production order 6. A ledger containing the job order cost sheets 7. A ledger containing a record for each of the different types of finished products 8. The rate at which the estimated cost of overhead is charged to each job 9. A cost accounting system whereby unit costs of manufactured items are determined by totaling unit costs in each production department 10. The result of applied overhead exceeding the actual overhead costs 11. A subsidiary ledger that contains a record for each overhead item 12. A record of all manufacturing costs charged to a specific job 13. A record of all manufacturing costs charged to a specific job 14. A specific order for a specific batch of manufactured items 15. A ledger containing the raw materials ledger cards 16. Production order 17. Using material, labor, and services on the factory floor 18. An inventory system that tracks the inventories on hand at all times 19. The result of actual overhead costs exceeding applied overhead
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Finished goods subsidiary ledger ____ Manufacturing overhead ledger ____ Raw materials subsidiary ledger ____ Work in process subsidiary ledger ____
Procurement ____ Raw materials ledger card ____ Time ticket ____ Production order ____
Production ____ Materials requisition ____ Job order cost accounting ____ Just-in-time system ____ Overapplied overhead ____ Overhead application rate ____ Perpetual inventory system ____ Process cost accounting ____ Job order ____ Standard costs ____ Underapplied overhead ____
Chapter 27 - Job Order Cost Accounting
20. An inventory system in which raw materials are ordered so they arrive just in time to be placed into production
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Job order cost sheet ____
Chapter 27 - Job Order Cost Accounting
Chapter 27 Job Order Cost Accounting Answer Key
True / False Questions
1. There is no need to take a physical count of inventory periodically when the perpetual inventory system is used. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Easy Topic: Cost Accounting
2. Standard cost accounting may be used with either a job order cost system or a process cost system. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Easy Topic: Cost Accounting
27-26
Chapter 27 - Job Order Cost Accounting
3. In a job order cost system, the entry to record the labor costs for a period includes a debit to Work in Process Inventory for direct labor and a debit to Manufacturing Overhead for indirect labor. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 27-04 Record labor costs incurred and charge labor into production. Level: Easy Topic: Job Order Cost Accounting System
4. The manufacturing overhead recorded in the Work in Process Inventory account is not necessarily the actual overhead incurred. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Level: Easy Topic: Job Order Cost Accounting System
5. The monthly total of the Overhead Applied section of all job order cost sheets should agree with the balance in the control account Manufacturing Overhead. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Easy Topic: Job Order Cost Accounting System
27-27
Chapter 27 - Job Order Cost Accounting
6. The entry to charge work in process inventory with the appropriate amount of applied overhead consists of a debit to Work in Process Inventory and a credit to Manufacturing Overhead Applied. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Level: Easy Topic: Job Order Cost Accounting System
7. When a perpetual inventory system is used, the balance of the Raw Materials Inventory account at the end of an accounting period should reflect the cost of materials on hand. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Easy Topic: Cost Accounting
8. When perpetual inventories are maintained in a job order cost system, as each job is completed its cost is transferred from Work in Process Inventory to Finished Goods Inventory. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Easy Topic: Cost Accounting
27-28
Chapter 27 - Job Order Cost Accounting
9. At the end of each year, the underapplied or overapplied overhead usually is closed out to the Cost of Goods Sold account. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Easy Topic: Job Order Cost Accounting System
10. Purchases of raw materials are debited to the Work in Process Inventory account. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 27-02 Journalize the purchase and issuance of direct and indirect materials. Level: Easy Topic: Job Order Cost Accounting System
11. Under the LIFO method of inventory pricing, the quantities issued are priced from the oldest inventory items available in the order they were received. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 27-03 Maintain perpetual inventory records. Level: Easy Topic: Job Order Cost Accounting System
12. There is no need for a raw materials inventory account when a just-in-time inventory system is used. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Easy Topic: Cost Accounting
27-29
Chapter 27 - Job Order Cost Accounting
13. Idle time is generally charged to manufacturing overhead. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 27-04 Record labor costs incurred and charge labor into production. Level: Easy Topic: Job Order Cost Accounting System
14. If a firm estimates that for the coming year it will have expected total direct labor costs of $60,000 and total manufacturing overhead costs of $36,000, its overhead application rate will be 60 percent. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Level: Medium Topic: Job Order Cost Accounting System
15. At the end of the month, if the total of the credits in the Manufacturing Overhead Applied account is greater than the total of the debits in the Manufacturing Overhead account, overhead has been underapplied. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Easy Topic: Job Order Cost Accounting System
27-30
Chapter 27 - Job Order Cost Accounting
Fill in the Blank Questions
16. A(n) ____________________ cost accounting system is normally used when standard types of products are made in continuous operations. process
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Easy Topic: Cost Accounting
17. A(n) ____________________ cost accounting system permits a firm to compare what its costs should be with its actual costs in order to evaluate efficiency. standard
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Easy Topic: Cost Accounting
18. The entry to record applied overhead includes a(n) ____________________ to Manufacturing Overhead Applied. credit
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Easy Topic: Job Order Cost Accounting System
27-31
Chapter 27 - Job Order Cost Accounting
19. Indirect labor is recorded by debiting the _________________________ account. Manufacturing Overhead
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 27-04 Record labor costs incurred and charge labor into production. Level: Easy Topic: Job Order Cost Accounting System
20. The entry to record applied overhead includes a(n) ____________________ to the Work in Process Inventory account. debit
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Level: Easy Topic: Job Order Cost Accounting System
21. The _________________________ rate is often computed by dividing estimated overhead costs by estimated direct labor costs. overhead application
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Level: Easy Topic: Job Order Cost Accounting System
22. If actual overhead costs exceed the overhead applied during the year, the difference represents ____________________ overhead. underapplied
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Easy Topic: Job Order Cost Accounting System
27-32
Chapter 27 - Job Order Cost Accounting
23. Under a perpetual inventory system, when goods are completed the Work in Process Inventory account is ___________________. credited
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 27-08 Record the cost of jobs completed and the cost of goods sold under a perpetual inventory system. Level: Easy Topic: Accounting for Job Orders
24. Under a perpetual inventory system, when goods are sold the Cost of Goods Sold account is ___________________. debited
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 27-08 Record the cost of jobs completed and the cost of goods sold under a perpetual inventory system. Level: Easy Topic: Accounting for Job Orders
25. In a just-in-time inventory system, the _________________________ account is debited when goods arrive. Work in Process Inventory
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Easy Topic: Cost Accounting
26. Under a job order cost system, unit costs are determined for products manufactured under each ___________________. production order; job order
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Easy Topic: Cost Accounting
27-33
Chapter 27 - Job Order Cost Accounting
27. When a cost accounting system is used, perpetual inventory records are kept for raw materials, work in process, and ___________________. finished goods
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Easy Topic: Cost Accounting
28. In a perpetual inventory system, each inventory account is supported by a(n) ____________________ ledger. subsidiary
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 27-02 Journalize the purchase and issuance of direct and indirect materials. Level: Easy Topic: Job Order Cost Accounting System
29. Materials may be withdrawn from the storeroom only on completion of a materials ___________________. requisition
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 27-02 Journalize the purchase and issuance of direct and indirect materials. Level: Easy Topic: Job Order Cost Accounting System
30. Workers who perform direct labor prepare a series of ____________________ to account for all time spent in the plant. time tickets
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 27-04 Record labor costs incurred and charge labor into production. Level: Easy Topic: Job Order Cost Accounting System
27-34
Chapter 27 - Job Order Cost Accounting
Multiple Choice Questions
31. When perpetual inventories are maintained in a job order cost system, the balance of the Work in Process Inventory account represents A. the actual costs incurred for labor, materials, and overhead on all jobs that were started but are not yet complete. B. the actual costs for the labor and materials used in uncompleted jobs and estimate of the overhead associated with these jobs. C. only the actual costs for the labor and materials used in uncompleted jobs. D. only the actual costs for the labor and materials used in completed jobs.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 27-01 Explain how a job order cost accounting system operates. Learning Objective: 27-02 Journalize the purchase and issuance of direct and indirect materials. Learning Objective: 27-03 Maintain perpetual inventory records. Learning Objective: 27-04 Record labor costs incurred and charge labor into production. Level: Easy Topic: Job Order Cost Accounting System
32. A standard cost system may be used A. only with a process cost system. B. only with a job order cost system. C. with either a job order cost system or a process cost system. D. in neither a job order cost system or a process cost system.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Easy Topic: Cost Accounting
27-35
Chapter 27 - Job Order Cost Accounting
33. When indirect materials are requisitioned from the materials storeroom and placed in production, an entry is made crediting Raw Materials Inventory and debiting A. Work in Process Inventory. B. Cost of Goods Manufactured. C. Manufacturing Overhead Applied. D. Manufacturing Overhead.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 27-02 Journalize the purchase and issuance of direct and indirect materials. Level: Easy Topic: Job Order Cost Accounting System
34. Actual overhead costs are A. debited to Work in Process Inventory when incurred. B. debited to Manufacturing Overhead when incurred. C. debited to Manufacturing Overhead Applied when incurred. D. credited to Manufacturing Overhead when incurred.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 27-04 Record labor costs incurred and charge labor into production. Level: Easy Topic: Job Order Cost Accounting System
35. The entry to record the application of overhead to jobs consists of A. a debit to Manufacturing Overhead Applied and a credit to Manufacturing Overhead. B. a debit to Manufacturing Overhead and a credit to Manufacturing Overhead Applied. C. a debit to Work in Process Inventory and a credit to Manufacturing Overhead Applied. D. a debit to Manufacturing Overhead Applied and a credit to Work in Process Inventory.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Level: Easy Topic: Job Order Cost Accounting System
27-36
Chapter 27 - Job Order Cost Accounting
36. At the end of the fiscal year, any overapplied or underapplied overhead is A. transferred to the Cost of Goods Sold account in an adjustment. B. shown on the balance sheet as either a deferred charge or a deferred credit. C. allocated to Cost of Goods Sold, Finished Goods Inventory, and Work in Process Inventory. D. transferred to the Cost of Goods Manufactured account in an adjustment.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Easy Topic: Job Order Cost Accounting System
37. Job order cost accounting is appropriate A. when there are continuous operations on standard types of products. B. when a company produces more than one product in batches rather than on a continuous basis. C. only for goods produced on special order. D. for all manufacturing companies.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Easy Topic: Cost Accounting
27-37
Chapter 27 - Job Order Cost Accounting
38. When a perpetual inventory system is used, sales revenue is recorded as products are sold, A. but the cost of the goods sold is not recorded. B. and the cost of the goods sold is transferred from the Finished Goods Inventory account to the Cost of Goods Sold account. C. and the cost of the goods sold is transferred from the Work in Process Inventory account to the Cost of Goods Sold account. D. and the cost of goods sold is transferred from the Cost of Goods Manufactured to the Cost of Goods Sold account.
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 27-08 Record the cost of jobs completed and the cost of goods sold under a perpetual inventory system. Level: Easy Topic: Accounting for Job Orders
39. When materials that will become part of a finished product are removed from the storeroom and placed in production, A. Work in Process Inventory is debited. B. Manufacturing Overhead is debited. C. Raw Materials Inventory is debited. D. Work in Process Inventory is credited.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 27-02 Journalize the purchase and issuance of direct and indirect materials. Level: Easy Topic: Job Order Cost Accounting System
40. A job order cost sheet summarizes A. the direct labor, direct materials used, and actual overhead costs incurred on a specific job. B. the direct labor, direct materials used, and applied overhead association with a specific job. C. the estimated costs that will be required to complete a specific job. D. the direct labor and direct materials used only.
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 27-07 Maintain job order cost sheets. Level: Easy Topic: Accounting for Job Orders
27-38
Chapter 27 - Job Order Cost Accounting
41. A firm purchased 25 units of materials with a unit price of $2.00 on May 5. On May 15, the firm purchased 25 units with a unit price of $2.10. If the firm uses the FIFO method of inventory pricing, the total cost of 30 units issued on May 20 would be A. $62.50. B. $60.00. C. $63.00. D. $60.50. (25 x 2) + (5 x 2.10) = 60.50.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 27-03 Maintain perpetual inventory records. Level: Medium Topic: Job Order Cost Accounting System
42. A firm purchased 25 units of materials with a unit price of $2.00 on May 5. On May 15, the firm purchased 25 units with a unit price of $2.10. If the firm uses the LIFO method of inventory pricing, the total cost of 30 units issued on May 20 would be A. $62.50. B. $60.00. C. $63.00. D. $60.50. (25 x 2.10) + (5 x 2) = 62.50.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 27-03 Maintain perpetual inventory records. Level: Medium Topic: Job Order Cost Accounting System
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43. A firm purchased 50 units of materials with a unit price of $1.30 on June 1. On June 15, the firm purchased 50 units with a unit price of $1.20. If the firm uses the LIFO method of inventory pricing, the total cost of 65 units issued on June 20 would be A. $83.00. B. $79.50. C. $78.00. D. $84.50. (50 x 1.20) + (15 x 1.30) = 79.50.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 27-03 Maintain perpetual inventory records. Level: Medium Topic: Job Order Cost Accounting System
44. A firm purchased 50 units of materials with a unit price of $1.30 on June 1. On June 15, the firm purchased 50 units with a unit price of $1.20. If the firm uses the FIFO method of inventory pricing, the total cost of 65 units issued on June 20 would be A. $83.00. B. $79.50. C. $78.00. D. $84.50. (50 x 1.30) + (15 x 1.20) = 83.00.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 27-03 Maintain perpetual inventory records. Level: Medium Topic: Job Order Cost Accounting System
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45. A raw material subsidiary ledger A. contains a raw materials card for each item of direct materials only. B. contains a raw materials card for each item of indirect materials only. C. contains a raw materials card for each item of direct materials and indirect materials. D. contains a raw material card for each supplier of raw materials.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 27-02 Journalize the purchase and issuance of direct and indirect materials. Level: Easy Topic: Job Order Cost Accounting System
46. Job order cost sheets constitute a subsidiary ledger that supports A. the Work in Process Inventory account. B. the Finished Goods Inventory account. C. the Raw Materials Inventory account. D. the Cost of Goods Manufactured account.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 27-07 Maintain job order cost sheets. Level: Easy Topic: Accounting for Job Orders
47. Process cost accounting is appropriate A. exclusively for companies that produce only one product. B. when a company produces more that one product in batches rather than on a continuous basis. C. when a company produces what each customer wants on special order. D. when there are continuous operations on standard types of products.
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Easy Topic: Cost Accounting
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Chapter 27 - Job Order Cost Accounting
48. The total direct labor charged to all job cost sheets must agree with the direct labor debited to A. Time Tickets. B. Wages Payable. C. Work in Process Inventory. D. Wages Expense.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 27-04 Record labor costs incurred and charge labor into production. Level: Easy Topic: Job Order Cost Accounting System
49. What is the subsidiary ledger that contains a record for each overhead item called? A. Manufacturing Overhead Control B. Manufacturing Overhead Ledger C. Manufacturing Overhead Records Book D. Manufacturing Overhead Card
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Level: Easy Topic: Job Order Cost Accounting System
50. Manufacturing overhead includes all of the following except A. indirect labor. B. direct labor. C. utilities. D. payroll taxes on factory labor.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Level: Easy Topic: Job Order Cost Accounting System
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Chapter 27 - Job Order Cost Accounting
51. The ______ is a record of all manufacturing costs charged to a specific job. A. Cost of Goods Sold B. Standard Costs Card C. Work in Process Inventory D. Job Order Cost Sheet
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 27-07 Maintain job order cost sheets. Level: Easy Topic: Job Order Cost Accounting System
52. If the manufacturing overhead was overapplied, then A. the manufacturing overhead account had more debits than credits. B. the manufacturing overhead account had more credits than debits. C. the actual overhead expenses were more than the amount going to Work in Process. D. the debits to Work in Process were more than the credits to Work in Process.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Easy Topic: Job Order Cost Accounting System
53. The McGreen Company employees worked 10,000 hours last year with an average hourly rate of $11 per hour. The overhead was $495,000. If overhead is based on direct labor costs, then the overhead rate is ________ per direct labor dollar. A. $11.00 B. $49.50 C. $4.50 D. $4.95 495,000/(10,000 x 11).
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Level: Medium Topic: Job Order Cost Accounting System
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Chapter 27 - Job Order Cost Accounting
54. If manufacturing overhead is applied at a rate of $1.50 per direct labor dollar and the Department B worker had worked 200 hours at $12 an hour on Job L1147, then the applied overhead would be A. $3,600. B. $18. C. $300. D. $2,400. (200 x 12) x 1.50 = 3,600.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Level: Medium Topic: Job Order Cost Accounting System
55. Martinez Manufacturing applies overhead based on direct labor hours. The company estimates that their overhead for the year will be $180,000, and that they will use 72,000 direct labor hours. Martinez Manufacturing actually used 75,000 direct labor hours. The journal entry to record manufacturing overhead would include a: A. Debit to Work in Process Inventory for $187,500. B. Credit to Manufacturing Overhead Applied for $180,000. C. Debit to Work in Process Inventory for $180,000. D. Debit to Manufacturing Overhead Applied for $187,500.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Level: Medium Topic: Job Order Cost Accounting System
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Chapter 27 - Job Order Cost Accounting
56. Martinez Manufacturing applies overhead based on direct labor hours. The company estimates that their overhead for the year will be $180,000, and that they will use 72,000 direct labor hours. During the year, Martinez Manufacturing actually used 75,000 direct labor hours and actual overhead costs were $190,000. At the end of the year, manufacturing overhead was: A. Overapplied by $2,500. B. Overapplied by $10,000. C. Underapplied by $2,500. D. Underapplied by $10,000.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Medium Topic: Job Order Cost Accounting System
57. Wilson Enterprises applies overhead based on direct labor cost. The company estimates that their overhead for the year will be $240,000, and direct labor cost to be $300,000. Actual direct labor cost for Martinez Manufacturing was $280,000. The journal entry to record manufacturing overhead would include a: A. Debit to Work in Process Inventory for $240,000. B. Credit to Manufacturing Overhead Applied for $350,000. C. Credit to Work in Process Inventory for $224,000. D. Credit to Manufacturing Overhead Applied for $224,000.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Level: Medium Topic: Job Order Cost Accounting System
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Chapter 27 - Job Order Cost Accounting
58. Wilson Enterprises applies overhead based on direct labor cost. The company estimates that their overhead for the year will be $240,000, and direct labor cost to be $300,000. Actual direct labor cost for Martinez Manufacturing was $280,000 and actual overhead costs were $220,000. At the end of the year, manufacturing overhead was: A. Overapplied by $20,000. B. Underapplied by $20,000. C. Overapplied by $4,000. D. Underapplied by $4,000.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Medium Topic: Job Order Cost Accounting System
59. At the end of the year the Manufacturing Overhead account is closed into what account? A. Work in Process B. Finished Goods C. Cost of Goods Sold D. Manufacturing Overhead Control
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Easy Topic: Job Order Cost Accounting System
60. At the end of the year, Harding Company had a balance in Manufacturing Overhead of $19,000, and a balance in Manufacturing Overhead Applied of $20,000. When the Manufacturing Overhead account is closed, the Cost of Goods Sold account will be: A. Increased by $1,000. B. Decreased by $1,000. C. Unaffected. D. Closed to Manufacturing Overhead Applied.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Medium Topic: Job Order Cost Accounting System
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Chapter 27 - Job Order Cost Accounting
61. At the end of the year, Easton Company had a balance in Manufacturing Overhead of $20,000, and a balance in Manufacturing Overhead Applied of $19,000. When the Manufacturing Overhead account is closed, the Cost of Goods Sold account will be: A. Increased by $1,000. B. Decreased by $1,000. C. Unaffected. D. Closed to Manufacturing Overhead Applied.
AACSB: Analytic AICPA BB: Industry Bloom's: Apply Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Medium Topic: Job Order Cost Accounting System
62. How often are direct labor costs entered on the Job Order Cost Sheets? A. Daily B. Weekly C. Monthly D. Immediately—as time cards are completed
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 27-07 Maintain job order cost sheets. Level: Easy Topic: Job Order Cost Accounting System
63. What form is presented at the storeroom to obtain materials or supplies? A. Materials Request Form B. Materials Requisition Form C. Raw Materials Ledger Card D. Production Order Form
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 27-03 Maintain perpetual inventory records. Level: Easy Topic: Job Order Cost Accounting System
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Chapter 27 - Job Order Cost Accounting
Short Answer Questions
64. Millenium Manufacturing is considering two methods for applying overhead. Estimated data for the next year, 2013, follows.
1. What would be the overhead application rate based on direct labor costs? 2. What would be the overhead application rate based on direct labor hours? 3. If a job requires 650 hours of direct labor, what would be the amount of overhead applied to the job using the rate based on direct labor hours? 1. 64%; 2. $6.20; 3. $4,030
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Level: Medium Topic: Job Order Cost Accounting System
65. During the year, a firm's direct labor costs were $95,000. The firm applies overhead at the rate of 75 percent of direct labor costs. The firm's actual overhead costs for the year were $72,315. 1. What was the amount of overhead applied? 2. Did the firm have overapplied or underapplied overhead for the year? 3. What amount was overapplied or underapplied? 1. $71,250; 2. underapplied; 3. $1,065
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Medium Topic: Job Order Cost Accounting System
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Chapter 27 - Job Order Cost Accounting
66. During the year, a firm's direct labor costs were $115,000. The firm applies overhead at the rate of 80 percent of direct labor costs. The firm's actual overhead costs for the year were $90,665. 1. What was the amount of overhead applied? 2. Did the firm have overapplied or underapplied overhead for the year? 3. What amount was overapplied or underapplied? 1. $92,000; 2. overapplied; 3. $1,335
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Medium Topic: Job Order Cost Accounting System
67. During the year, Job EH-02 for 500 units was begun and completed. Costs entered on the job order cost sheet for this job were $15,400 for materials and $6,500 for labor. The firm applies overhead at the rate of 75 percent of direct labor costs. 1. What is the amount of overhead that should be applied to the job? 2. What is the total cost of the job? 3. What is the unit cost of the units produced? 1. $4,875; 2. $26,775; 3. $53.55
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Learning Objective: 27-07 Maintain job order cost sheets. Level: Medium Topic: Accounting for Job Orders Topic: Job Order Cost Accounting System
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Chapter 27 - Job Order Cost Accounting
The cost data for the Omega Manufacturing Company for the month of April 2013 is given below. (a.) Raw materials and supplies costing $34,000 were purchased. (b.) The summary of materials requisitions shows that materials and supplies costing $30,900 were issued for use in jobs. Direct materials accounted for $28,000, and the balance consisted of indirect materials and supplies. (c.) The payroll summary shows that direct labor costs were $15,000 and indirect labor costs were $3,000. Social security tax withheld was $1,116, Medicare tax withheld was $261, and income tax deductions were $1,550. (d.) Manufacturing overhead of $6,200 was incurred in addition to indirect materials and indirect labor (credit Accounts Payable). (e.) The predetermined overhead application rate is 75 percent of direct labor costs. (f.) The summary of completed jobs shows that the cost of these jobs amounted to $39,600. (g.) The summary of sales invoices shows that goods costing $32,000 were sold on credit for $51,000.
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Chapter 27 - Job Order Cost Accounting
68. Record the necessary entries on page 8 of a general journal. Omit descriptions.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 27-08 Record the cost of jobs completed and the cost of goods sold under a perpetual inventory system. Level: Medium Topic: Accounting for Job Orders
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Chapter 27 - Job Order Cost Accounting
69. Prepare a partial income statement for the month. Adjust the cost of goods sold for the amount of any overapplied or underapplied overhead.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 27-02 Journalize the purchase and issuance of direct and indirect materials. Learning Objective: 27-04 Record labor costs incurred and charge labor into production. Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Learning Objective: 27-08 Record the cost of jobs completed and the cost of goods sold under a perpetual inventory system. Level: Medium Topic: Accounting for Job Orders Topic: Job Order Cost Accounting System
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Chapter 27 - Job Order Cost Accounting
70. Every job includes some idle time that is usually handled in one of two ways. What are they and under what circumstances is each utilized? Generally idle time is put in manufacturing overhead. This would be done if idle time is the expected result of the daily operations. However, if a specific job is such that it is the cause of the idle time (i.e., specific requirements of the job or peculiarities of that particular job), then the idle time costs are charged directly to that job.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 27-04 Record labor costs incurred and charge labor into production. Level: Hard Topic: Job Order Cost Accounting System
71. What are the two principle cost accounting systems and give an example of a type of business which would use this system? Job Order Cost Accounting System: Used by businesses that produce special orders or produce more than one product in batches (i.e. custom drapery manufacturers, machine tool plant, and furniture manufacturers). Process Cost Accounting System: Used when standard products are manufactured using a continuous process (i.e. cement plant, flour mill, manufacturer of cake mixes).
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Easy Topic: Cost Accounting
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Chapter 27 - Job Order Cost Accounting
72. List the four manufacturing operations and define each. For the second operation, Production, summarize the flow of costs through a job order cost accounting system. The four manufacturing operations are: Procurement or Purchasing: This is the obtaining of the necessary components for production—materials, labor, and services. Production: For this manufacturing operation, the materials, labor, and services are used in the factory to make the products. Production flow—Materials go into the Raw Materials Inventory (RMI) account as they are purchased. Materials leave the Raw Materials Inventory account when requisitioned for production. At that time they enter the Work in Process Inventory (WIPI). Work done on production also goes into WIPI as work is done on the product. The Manufacturing Overhead (MOH) is increased by indirect materials from RMI, by indirect labor as it occurs, and by other expenses that are an indirect part of production. Costs are taken out of WIPI-reducing the account-when the products are completed. They go to Finished Goods Inventory (FGI) until they are sold, at which time they are taken out of FGI and placed in Cost of Goods Sold (COGS). Warehousing: This is the handling and storing of the completed products or finished goods. Selling: This operation consists of taking the finished goods from the storeroom for delivery to customers when the products are sold.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Medium Topic: Cost Accounting
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Chapter 27 - Job Order Cost Accounting
73. Fill in the blanks for each of the following. (Blanks are indicated by numbers in parentheses.)
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Chapter 27 - Job Order Cost Accounting
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Medium Topic: Cost Accounting
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Chapter 27 - Job Order Cost Accounting
74. Briefly describe a Just-in-Time (JIT) system. List the advantages and disadvantages of a JIT system. JIT is a system adopted by some manufacturing companies in order to greatly reduce or eliminate the Raw Materials Inventory account. Goods are ordered as needed for production and placed immediately to the factory floor and the Work in Process account. Advantages of JIT: reduces the amount of working capital tied up in inventory, reduces the space necessary for inventory storage reduces the need for storeroom personnel reduces insurance expense reduces the amount of record keeping necessary. Disadvantages of JIT: if vendors/suppliers are not dependable, shortages may occur, damaged goods or late deliveries may cause a halt in the manufacturing operations and sales may be lost.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Understand Learning Objective: 27-01 Explain how a job order cost accounting system operates. Level: Easy Topic: Cost Accounting
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Chapter 27 - Job Order Cost Accounting
75. Morion Hat Manufacturing made the following charge purchases on February 4 of the current year. Felt $5,687; Ribbon $1,234; Straw $6,723; Dye (for the straw) $39; Thread $47; Various plastic fruits, flowers, etc. $179; and Glue $28. Assume that all items purchased were requisitioned for production during the year. Complete one journal entry for all purchases and one summary journal entry dated February 20 for the requisitioning of those materials into production. Also, explain the internal controls applied to safeguard raw materials. Note: Only the dye, glue, and thread are considered overhead. Some students may put the various plastic fruits, flower, etc. into indirect materials. If so the direct material would be $13,644 and the total for indirect materials would be $293.
To promote strong internal control, prenumbered purchase orders are used. The materials and supplies are checked to the included documentation to ensure that the material ordered was received and that the quantity is correct. A report with this information accompanies the items to the storeroom. Before the invoice is approved for payment, it is checked against the receiving report and the purchase order. Internal controls over materials are also in place for the releasing of materials into production. Materials Requisition forms are used. These forms describe the item and quantity needed and shows the job and/or purpose. The forms are also used as documentation for recording them on the individual raw materials ledger cards.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 27-02 Journalize the purchase and issuance of direct and indirect materials. Level: Hard Topic: Job Order Cost Accounting System
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Chapter 27 - Job Order Cost Accounting
76. What form is used to keep track of inventory of raw materials? What additional information does the form provide if a perpetual inventory system is utilized? The form is the Raw Materials Ledger Card. The record keeping on this card provides information regarding the inventory balance for each item. The information on the card also shows the inventory method in use (LIFO, FIFO, or average cost) and keeps a running balance of the inventory if the perpetual inventory system is used.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 27-03 Maintain perpetual inventory records. Level: Hard Topic: Job Order Cost Accounting System
77. The Manufacturing Overhead Applied account for Djos Domal Company had activity of $567 in indirect materials and supplies, $785 in indirect labor, and $3,455 in other overhead costs recorded in the account at August 31 of the current year. The Manufacturing Overhead Applied account had a total of $4,600 in overhead applied during August. What is the over-or underapplied overhead for August? Prepare the journal entry to close the related overhead accounts. The underapplied overhead for August is $207.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Medium Topic: Job Order Cost Accounting System
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Chapter 27 - Job Order Cost Accounting
78. The Manufacturing Overhead Applied account for Cullverin Manufacturing had activity of $860 in indirect materials and supplies, $992 in indirect labor, and $4,654 in other overhead costs recorded in the account at April 30 of the current year. The Manufacturing Overhead Applied account had a total of $6,740 in overhead applied during April. What is the over-or underapplied overhead for April? Prepare the journal entry to close the related overhead accounts. The overapplied overhead for April is $234.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 27-06 Compute overapplied or underapplied overhead and report it in the financial statements. Level: Medium Topic: Job Order Cost Accounting System
Davit Boat Building has three jobs in process in November of the current year, A1-13, R18-4, and B2-19. All three were begun on November 1st. Job A1-13 was completed on November 21st with total labor costs of $8,750 and total material costs of $7,725. No other jobs were completed in November. The total balance in Job R18-4 is $3,275 ($675 in materials and $2,600 in labor) and in Job B2-19 is $6,782 ($1,240 in materials and $5,542 in labor) before overhead is applied. Overhead is applied based on total direct labor dollars. Estimated total direct labor dollars for the year is $245,000 and total estimated manufacturing overhead is $367,500.
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79. Based on the information given: 1. Determine the overhead rate for Davit Boat Building; 2. Prepare the journal entry to apply manufacturing overhead to manufacturing process for the month of November; 3. Determine the balance in the Work in Process account. 1. The overhead application rate for the current year is 1.5 times direct labor cost. (367,500/245,000) 2.
3. The balance in the Work in Process account is $22,270.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Learning Objective: 27-07 Maintain job order cost sheets. Level: Medium Topic: Accounting for Job Orders Topic: Job Order Cost Accounting System
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Chapter 27 - Job Order Cost Accounting
80. Based on the information given, complete the Job Order Cost Sheet for Job A1-13.
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Chapter 27 - Job Order Cost Accounting
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Learning Objective: 27-07 Maintain job order cost sheets. Level: Medium Topic: Accounting for Job Orders Topic: Job Order Cost Accounting System
Adams Manufacturing has three jobs in process in October of the current year, B2-19, C3-19, and D4-4. All three were begun during the first week of October. Job C3-19 was completed on October 10th with total labor costs of $14,750 and total material costs of $8,855. No other jobs were completed in October. The total balance in Job D4-4 is $8,250 ($4,275 in materials and $3,975 in labor) and in Job B2-19 is $17,850 ($10,425 in materials and $7,425 in labor) before overhead is applied. Overhead is applied based on total direct labor dollars. Estimated total direct labor dollars for the year is $440,000 and total estimated manufacturing overhead is $352,000.
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Chapter 27 - Job Order Cost Accounting
81. Based on the information given: 1. Determine the overhead rate for Adams Manufacturing; 2. Prepare the journal entry to apply manufacturing overhead to manufacturing process for the month of October; 3. Determine the balance in the Work in Process account at the end of October. 1. The overhead application rate for the current year is 0.8 times direct labor cost. (352,000/440,000) 2.
3. The balance in the Work in Process account as of October 31st is the total of $35,220.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Learning Objective: 27-07 Maintain job order cost sheets. Level: Medium Topic: Accounting for Job Orders Topic: Job Order Cost Accounting System
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Chapter 27 - Job Order Cost Accounting
82. Based on the information given, complete the Job Order Cost Sheet for Job C3-19.
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AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 27-05 Compute overhead rates and apply overhead to jobs. Learning Objective: 27-07 Maintain job order cost sheets. Level: Medium Topic: Accounting for Job Orders Topic: Job Order Cost Accounting System
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Chapter 27 - Job Order Cost Accounting
Matching Questions
83. Match the following definitions with the correct term from the list provided. 1. A measure of what costs should be in an efficient operation 2. Form used to record hours worked and jobs performed 3. A record showing details of receipts and issues for a type of raw material 4. A form that describes the item and quantity needed and shows the job or purpose 5. A cost accounting system that determines the unit cost of manufactured items for each separate production order 6. A ledger containing the job order cost sheets 7. A ledger containing a record for each of the different types of finished products 8. The rate at which the estimated cost of overhead is charged to each job 9. A cost accounting system whereby unit costs of manufactured items are determined by totaling unit costs in each production department 10. The result of applied overhead exceeding the actual overhead costs 11. A subsidiary ledger that contains a record for each overhead item 12. A record of all manufacturing costs charged to a specific job 13. A record of all manufacturing costs charged to a specific job 14. A specific order for a specific batch of manufactured items 15. A ledger containing the raw materials ledger cards 16. Production order 17. Using material, labor, and services on the factory floor 18. An inventory system that tracks the inventories on hand at all times 19. The result of actual overhead costs exceeding applied overhead
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Finished goods subsidiary ledger 7 Manufacturing overhead ledger 11 Raw materials subsidiary ledger 15 Work in process subsidiary ledger 6
Procurement 12 Raw materials ledger card 3 Time ticket 2 Production order 14
Production 17 Materials requisition 4 Job order cost accounting 5 Just-in-time system 20 Overapplied overhead 10 Overhead application rate 8 Perpetual inventory system 18 Process cost accounting 9 Job order 16 Standard costs 1 Underapplied overhead 19
Chapter 27 - Job Order Cost Accounting
20. An inventory system in which raw materials are ordered so they arrive just in time to be placed into production AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 27-01 Explain how a job order cost accounting system operates. Learning Objective: 27-09 Define the accounting terms new to this chapter. Level: Medium Topic: Accounting for Job Orders Topic: Cost Accounting
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Job order cost sheet 12
Chapter 28 - Process Cost Accounting
Chapter 28 Process Cost Accounting True / False Questions
1. In a process cost accounting system, the average unit cost of a product is determined by dividing the total manufacturing cost incurred by the number of units placed in production during the period. True False
2. To compute the unit cost of production for a year, the beginning inventory cost is added to the current period manufacturing costs, and the total is divided by the equivalent units of production. True False
3. The ending work in process inventory does not appear on the following month's cost of production report. True False
4. When the average cost method is used, units in beginning inventory which are 40 percent complete are multiplied by 60 percent to compute equivalent units of production. True False
5. Equivalent production units are determined for materials and labor but not for manufacturing overhead. True False
6. Goods transferred to another department for further processing are nonetheless considered 100 percent complete on the cost of production report of the department making the transfer. True False
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Chapter 28 - Process Cost Accounting
7. In a process cost accounting system, a separate Work in Process Inventory account is maintained for each producing department. True False
8. A cost of production report provides separate sections to summarize quantities and costs. True False
9. On a cost of production report, the total of the costs of products transferred out of a department and the cost of the ending work in process in the department must equal the cumulative total cost for the department. True False
10. Materials issued to production are recorded by debiting Raw Materials Inventory and crediting the departmental work in process accounts. True False
11. At the end of the month, the balance in the Manufacturing Overhead control account is closed into the departmental work in process accounts. True False
12. The entry to record the transfer of goods from Department A to Department B would include a debit to the Work in Process account for Department A. True False
13. Under the average cost method, the beginning inventory amount for each cost element is added to the amount of that cost element incurred during the current period. True False
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Chapter 28 - Process Cost Accounting
14. In the manufacturing overhead subsidiary ledger, a departmental cost sheet is set up for each producing and each service department. True False
15. The units transferred in from a prior department are included in the quantity to be accounted for on the cost of production report for the receiving department. True False
Fill in the Blank Questions
16. To obtain meaningful unit costs in a process cost accounting system, the work accomplished must be measured in ____________________ production units. ________________________________________
17. An ending work in process inventory of 500 units that are 40 percent complete is equivalent to ____________________ units of production. ________________________________________
18. The data about costs, ___________________, and equivalent production is assembled in a cost of production report. ________________________________________
19. In the ____________________ cost accounting system, costs for materials, labor, and manufacturing overhead are charged to the Work in Process Inventory accounts of the producing departments. ________________________________________
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Chapter 28 - Process Cost Accounting
20. In the process cost accounting system, the ____________________ of the ending work in process is estimated. ________________________________________
21. Costs of ____________________ departments are allocated as manufacturing overhead to the producing departments that benefit. ________________________________________
22. A cost of production report usually contains a(n) ____________________ schedule and a cost schedule. ________________________________________
23. Equivalent production units must be computed separately for materials, labor, and ____________________ whenever the stages of completion for the elements are different. ________________________________________
24. When the ____________________ cost method is used to calculate unit costs, the beginning inventory costs are added to the current period costs, and the sum is divided by the equivalent production units. ________________________________________
25. The ending balance of a(n) ____________________ Inventory account for a producing department must agree with the amount shown for that department in the cost of production report. ________________________________________
26. A process cost accounting system may be viewed as a monthly ____________________ cost system. ________________________________________
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Chapter 28 - Process Cost Accounting
27. On a cost of production report, the ____________________ total cost must equal the total costs accounted for. ________________________________________
28. Materials issued to production are recorded by ____________________ the departmental work in process accounts. ________________________________________
29. At the end of the month, the entry to close the Manufacturing Overhead control account includes a ____________________ to Manufacturing Overhead. ________________________________________
30. When finished goods are sold, the entry to record the cost of goods sold includes a ____________________ to the Cost of Goods Sold account. ________________________________________
Multiple Choice Questions
31. During one month, 3,000 units of a product were completed and 800 units were 20 percent complete and still in process. The equivalent production for the month is A. 3,800 units. B. 4,000 units. C. 3,040 units. D. 3,160 units.
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Chapter 28 - Process Cost Accounting
32. The ending Work in Process inventory in the mixing department contains 300 units that are 70% complete with respect to labor costs. How many equivalent units are in the ending inventory? A. 300 units. B. 140 units. C. 70 units. D. 210 units.
33. Process cost accounting is most appropriate A. when there is continuous production on a single product. B. when a company produces more than one product in batches rather than on a continuous basis. C. for companies with either continuous or batch processing of different products. D. for all manufacturing companies.
34. A firm had 600 units in its work in process inventory at the beginning of a month. Of these units, 30 percent were complete with respect to labor, materials, and overhead. The firm transferred 5,000 units to the finished goods inventory during the month. It had 500 units of which 40 percent were complete and still in process at the end of the month. Equivalent production for the month was A. 5,680 units. B. 5,380 units. C. 5,200 units. D. 5,180 units.
35. McGill Manufacturing had 900 units in its work in process inventory at the beginning of a month. Of these units, 40 percent were complete with respect to labor, and 100% complete with respect to materials, and overhead. The firm transferred 4,000 units to the finished goods inventory during the month. It had 600 units of which 30 percent were complete and still in process at the end of the month. Equivalent production for the month was A. 4,600 units. B. 4,420 units. C. 4,240 units. D. 4,180 units.
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Chapter 28 - Process Cost Accounting
36. A firm had a beginning work in process inventory totaling $4,000 and current period costs of $22,500. Equivalent production was 5,000 units, and 3,000 units were completed and transferred to the finished goods inventory. Inventory costs would be determined using a unit cost of A. $8.83. B. $5.30. C. $4.50. D. $7.50.
37. Simon Productions Company had a beginning work in process inventory totaling $6,000. During the current period, the company added materials costs of $12,300, labor cost of $14,500 and overhead of $18,200. Equivalent production was 12,000 units, and 9,000 units were completed and transferred to the finished goods inventory. Inventory costs would be determined using a unit cost of A. $5.67. B. $3.75. C. $4.25. D. $8.50.
38. A department transferred 7,000 units to the finished goods storeroom during a month. There was no beginning work in process inventory, but 500 units were still in process at the end of the month. Equivalent production for the month was 7,400 units, and production costs incurred totaled $16,800. Inventory costs would be determined using a unit cost of A. $2.27. B. $2.40. C. $2.24. D. $2.58.
39. The Painting Department transferred 6,000 units to the finished goods storeroom during a month. There was no beginning work in process inventory, but 800 units were still in process at the end of the month, and were 70% complete, and production costs incurred totaled $21,320. Inventory costs would be determined using a unit cost of A. $3.55. B. $3.42. C. $3.25. D. $3.14.
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Chapter 28 - Process Cost Accounting
40. The Completion Department transferred 8,000 units to the finished goods storeroom during a month. There was no beginning work in process inventory, but 1,000 units were still in process at the end of the month, and were 40% complete. Inventory costs at the end of the month were $3.50. What were total production costs for the month? A. $28,000. B. $29,400. C. $30,100. D. $31,500.
41. A firm had no work in process at the beginning of a month. It transferred 4,000 units to finished goods during the month, and 500 units were still in process at the end of the month. Equivalent production for the month was 4,400 units. At what stage of completion were the unfinished units at the end of the month? A. 67 percent B. 75 percent C. 20 percent D. 80 percent
42. Fraser Manufacturing had no work in process at the beginning of a month. It transferred 6,000 units to finished goods during the month, and 800 units were still in process at the end of the month. Equivalent production for the month was 6,480 units. At what stage of completion were the unfinished units at the end of the month? A. 60 percent B. 40 percent C. 30 percent D. 80 percent
43. Unit Manufacturing Company had no work in process at the beginning of a month. At the end of the month, 600 units were still in process at the end of the month, and were 40% complete. Equivalent production for the month was 5,240 units. How many units were transferred out of production to finished goods during the month? A. 5,240 units. B. 5,000 units. C. 4,760 units. D. 4,400 units.
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Chapter 28 - Process Cost Accounting
44. Equivalent production units may be computed A. for labor only. B. for labor and materials only. C. for labor, materials, and manufacturing overhead. D. for materials and manufacturing overhead only.
45. In a process cost accounting system, the average unit cost of a product is determined by dividing the appropriate costs by A. the number of units placed in production during the period. B. the number of units transferred to another department. C. the equivalent production units. D. the number of units transferred to the finished goods inventory.
46. The source of the cost data that appears in a cost of production report is A. the Finished Goods Inventory account. B. the job order cost sheet. C. the prior period income statement. D. the Work in Process Inventory accounts.
47. In a process cost accounting system, A. the Finished Goods Inventory account is debited for the cost of completed units any time during the month. B. the Work in Process Inventory accounts are used to accumulate the costs for labor, materials, and manufacturing overhead. C. manufacturing overhead is not included in the determination of inventory costs. D. inventory costs are calculated when goods are sold.
48. On a cost of production report, beginning work in process A. is included in the quantity to be accounted for. B. is included in the quantity accounted for. C. is not included on the report. D. appears on the job cost sheet only.
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Chapter 28 - Process Cost Accounting
49. The entry to transfer costs from Department A to Department B is recorded as A. a debit to Finished Goods Inventory and a credit to Work in Process—Dept. A. B. a debit to Work in Process—Dept. B and a credit to Work in Process—Dept. A. C. a debit to Work in Process—Dept. A and a credit to Work in Process—Dept. B. D. a debit to Work in Process—Dept. A and a credit to Finished Goods Inventory.
50. When finished goods are sold, the entry to record the cost of goods sold includes A. a debit to Finished Goods Inventory and a credit to Cost of Goods Sold. B. a debit to Cost of Goods Sold and a credit to Sales. C. a debit to Cost of Goods Sold and a credit to Finished Goods Inventory. D. a debit to Finished Goods Inventory and a credit to Sales.
51. At the end of the month, the entry to close the Manufacturing Overhead control account is recorded as A. a debit to Manufacturing Overhead Applied and a credit to Manufacturing Overhead. B. a debit to Work in Process Inventory accounts and a credit to Manufacturing Overhead. C. a debit to Manufacturing Overhead and a credit to the Work in Process inventory accounts. D. a debit to Manufacturing Overhead and a credit to Manufacturing Summary.
52. During the month, 1,600 units of a product were completed and 900 units were two-thirds complete with respect to labor and still in process. The total equivalent units of production for labor for the month is A. 2,200 units. B. 2,400 units. C. 2,500 units. D. 2,600 units.
53. During the month, 2,700 units of a product were completed and 800 units were 60% complete with respect to labor and still in process. The total equivalent units of production for labor for the month is A. 2,700 units. B. 2,400 units. C. 3,180 units. D. 4,320 units.
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Chapter 28 - Process Cost Accounting
54. The two sections of the cost of production report are A. the total to be accounted for and the total accounted for. B. the costs assigned to the goods transferred out and the costs assigned to the goods still in process. C. the summary of quantities and the summary of costs. D. beginning inventory plus goods started and goods transferred out and ending inventory.
55. Each section of the production report has two parts. They reconcile A. the total to be accounted for and the total accounted for. B. the beginning inventory plus units started and the units started and completed and the ending inventory. C. the costs in beginning work in process and the costs added during the period. D. the beginning inventory and the ending inventory.
56. The total accounted for consists of A. the units started in production. B. the units transferred out and the units in ending work in process. C. the units started and the units transferred out. D. the units transferred out and the units completed.
57. The headings for the columns of the Cost Schedule section of the Production Report when there is no beginning inventory are A. Total Cost and Unit Cost. B. Total Cost and E.P. Units. C. E.P. Units and Unit Cost. D. Total Cost, E.P. Units, and Unit Cost.
58. The part of the Cost Schedule showing the total and unit cost of each element and the cumulative cost total is the A. total costs transferred out. B. costs accounted for. C. costs to be accounted for. D. total work in process.
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Chapter 28 - Process Cost Accounting
59. Total costs accounted for consists of the A. cumulative cost plus the work in process—ending costs. B. total costs transferred out less the total work in process—ending costs. C. cumulative cost plus total costs transferred out. D. total costs transferred out plus the total work in process—ending costs.
60. Rounding is often necessary to make the Production Report cumulative cost total agree to the total costs accounted for. In the following periods, the amount of the adjustment is either added to or subtracted from the _____________ in work in process. A. direct materials B. direct labor C. manufacturing overhead D. credit entry
61. The current department costs categories are A. work in process—beginning costs, started in production costs, and transferred in costs. B. materials costs, labor costs, and manufacturing overhead costs. C. work in process—beginning costs, transferred out to next department costs, and work in process—ending costs. D. started in production costs, transferred in from prior department costs, and transferred out to next department costs.
62. When beginning inventory is part of the production report, costs from the prior department are included. They are A. the beginning inventory amount and the costs transferred in. B. the beginning inventory amount. C. the costs transferred in. D. the beginning inventory costs transferred in.
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Chapter 28 - Process Cost Accounting
63. The method that combines the cost of beginning inventory and the current costs of the period is the A. market value process costing method. B. method of net realizable value. C. replacement cost method. D. average method of process costing.
Short Answer Questions
64. Data about production in Dept. B for June is given below.
1. Compute the equivalent units of production for the prior department costs. 2. Compute the equivalent units of production for materials. 3. Compute the equivalent units of production for labor and overhead.
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Chapter 28 - Process Cost Accounting
65. Data about production in the Processing Department for July is given below.
1. Compute the equivalent units of production for the prior department costs. 2. Compute the equivalent units of production for materials. 3. Compute the equivalent units of production for labor and overhead.
66. On July 1, 2013, there was no beginning inventory in Dept. A, the first department. During the month, production was started on 3,000 units. The total cost of materials was $18,000. All materials were placed in production at the start of the manufacturing process in the department. During the month, 2,400 units were transferred to the next department. There were 600 units still in process at the end of the month. 1. What is the cost per equivalent unit for materials? 2. What is the cost of materials in the goods transferred to the next department? 3. What is the cost of materials in the ending work in process inventory?
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Chapter 28 - Process Cost Accounting
67. On October 1, 2012, there was no beginning inventory in the Bottling Department. During the month, production was started on 7,400 units. The total cost of materials was $29,600. All materials were placed in production at the start of the manufacturing process in the department. During the month, 5,800 units were transferred to the next department. There were 1,600 units still in process at the end of the month. 1. What is the cost per equivalent unit for materials? 2. What is the cost of materials in the goods transferred to the next department? 3. What is the cost of materials in the ending work in process inventory?
The Vinh Corporation has two producing departments. Cost data from the firm's records for the month of January 2013 is given below. There were no beginning inventories.
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Chapter 28 - Process Cost Accounting
68. Prepare equivalent production computations for each department.
69. Prepare a cost of production report for the Fabricating Department.
70. Prepare a cost of production report for the Assembling Department.
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Chapter 28 - Process Cost Accounting
71. In Gerth Manufacturing, production is started in the fabricating department. The work is then transferred to the finishing department where goods are completed and then transferred to the finished goods storeroom. Data about the company's costs during February 2013 are given below.
During the month, products costing $45,000 were transferred from the fabricating department to the finishing department; goods costing $56,000 were transferred from the finishing department to finished goods inventory; and goods that cost $63,000 were sold on account for $79,000. Record the following events on page 3 of a general journal. Use February 28 as the date. Omit descriptions. (a.) Place materials into production (b.) Charge labor costs into production (c.) Charge overhead costs into production (d.) Transfer product from fabricating department to finishing department (e.) Transfer finished goods from finishing department to finished goods inventory (f.) Sale of goods (g.) Record cost of goods sold
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Chapter 28 - Process Cost Accounting
Cost data for a firm's first department, Dept. A, for June 2013 is given below.
72. Prepare equivalent production computations for Dept. A from the information provided.
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Chapter 28 - Process Cost Accounting
73. Prepare a cost of production report for the month of June from the information given.
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Chapter 28 - Process Cost Accounting
74. Jocose Company recorded the following journal entries. Write a description for each numbered journal entry. Number your descriptions to match the journal entry numbers.
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Chapter 28 - Process Cost Accounting
75. Kobold Company manufactures lamps. In May, Department B started 4,500 units. None had been transferred in from a prior department. Of the 4,500 units started, 4,250 were transferred out—3,850 to the next department, Department C, and 400 were transferred to Finished Goods. All the materials issued during May were used in production while only 70% of the labor and overhead was added to the ending inventory. Calculate the equivalent units for material and for the labor and manufacturing overhead.
76. Jocund Manufacturing produces exercise machines. In February, all the materials issued to Department X were entered into production. There was no beginning inventory. Department X started 6,100 units. During February, 5,300 units were transferred out—4,750 to Department Y and 550 to Finished Goods. Of the 900 units in ending inventory, 65% of the labor and overhead had been added during the month. Calculate the equivalent units of production for material and for Labor and Manufacturing Overhead.
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Chapter 28 - Process Cost Accounting
77. Fill in the blanks in the Quantity Section of the following Production Report.
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Chapter 28 - Process Cost Accounting
78. Fill in the blanks in the Quantity Section of the following Production Report.
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Chapter 28 - Process Cost Accounting
79. Calculate the equivalent production units from the information given.
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Chapter 28 - Process Cost Accounting
80. Prepare the Quantity Schedule for Department J for October 2013 in good format from the information given.
81. Complete the Cost Schedule for Department J from the information given.
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Chapter 28 - Process Cost Accounting
82. Using the information given, what are the quantity to account for, the quantity accounted for, and the equivalent production units for the month of November for Department R?
83. Complete the Cost of Production Report for Department R for November from the information given.
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Chapter 28 - Process Cost Accounting
84. Explain the flow of production in a manufacturing environment for production as the products are started and moved through the production process and eventually sold. Include the account titles.
Matching Questions
85. Match the following definitions to the term that they relate to. 1. Costs of units transferred out plus the cost of the ending work in process units 2. All manufacturing costs not classified as direct materials or direct labor 3. Estimated number of units that could have been started and completed with the same effort and costs incurred in the department during the same time period 4. Cumulative cost total 5. The total of the number of units sold times the average cost for each 6. Summarizes total units to be accounted for and total units accounted for 7. The units completed but not yet sold 8. Units begun but not yet completed 9. All departmental manufacturing costs divided by the production for the period 10. Summarizes total costs to be accounted for and total costs accounted for
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unit cost ____ manufacturing overhead ____
costs accounted for ____ work in process ____ equivalent units ____ costs to be accounted for ____ finished goods ____ cost schedule ____ cost of goods sold ____ quantity schedule ____
Chapter 28 - Process Cost Accounting
Chapter 28 Process Cost Accounting Answer Key
True / False Questions
1. In a process cost accounting system, the average unit cost of a product is determined by dividing the total manufacturing cost incurred by the number of units placed in production during the period. FALSE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
2. To compute the unit cost of production for a year, the beginning inventory cost is added to the current period manufacturing costs, and the total is divided by the equivalent units of production. TRUE
AACSB: Analytic AICPA BB: Industry Bloom's: Understand Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Easy Topic: Work in Process Inventory
28-28
Chapter 28 - Process Cost Accounting
3. The ending work in process inventory does not appear on the following month's cost of production report. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Easy Topic: Work in Process Inventory
4. When the average cost method is used, units in beginning inventory which are 40 percent complete are multiplied by 60 percent to compute equivalent units of production. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Medium Topic: Work in Process Inventory
5. Equivalent production units are determined for materials and labor but not for manufacturing overhead. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
28-29
Chapter 28 - Process Cost Accounting
6. Goods transferred to another department for further processing are nonetheless considered 100 percent complete on the cost of production report of the department making the transfer. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
7. In a process cost accounting system, a separate Work in Process Inventory account is maintained for each producing department. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
8. A cost of production report provides separate sections to summarize quantities and costs. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-02 Prepare a cost of production report with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
9. On a cost of production report, the total of the costs of products transferred out of a department and the cost of the ending work in process in the department must equal the cumulative total cost for the department. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-02 Prepare a cost of production report with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
28-30
Chapter 28 - Process Cost Accounting
10. Materials issued to production are recorded by debiting Raw Materials Inventory and crediting the departmental work in process accounts. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Easy Topic: Process Cost Accounting System
11. At the end of the month, the balance in the Manufacturing Overhead control account is closed into the departmental work in process accounts. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Easy Topic: Process Cost Accounting System
12. The entry to record the transfer of goods from Department A to Department B would include a debit to the Work in Process account for Department A. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Easy Topic: Process Cost Accounting System
28-31
Chapter 28 - Process Cost Accounting
13. Under the average cost method, the beginning inventory amount for each cost element is added to the amount of that cost element incurred during the current period. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Easy Topic: Work in Process Inventory
14. In the manufacturing overhead subsidiary ledger, a departmental cost sheet is set up for each producing and each service department. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Easy Topic: Process Cost Accounting System
15. The units transferred in from a prior department are included in the quantity to be accounted for on the cost of production report for the receiving department. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-02 Prepare a cost of production report with no beginning work in process inventory. Learning Objective: 28-03 Compute the unit cost of manufacturing under the process cost accounting system. Level: Easy Topic: Process Cost Accounting System
28-32
Chapter 28 - Process Cost Accounting
Fill in the Blank Questions
16. To obtain meaningful unit costs in a process cost accounting system, the work accomplished must be measured in ____________________ production units. equivalent
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
17. An ending work in process inventory of 500 units that are 40 percent complete is equivalent to ____________________ units of production. 200
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
18. The data about costs, ___________________, and equivalent production is assembled in a cost of production report. quantities
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-02 Prepare a cost of production report with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
28-33
Chapter 28 - Process Cost Accounting
19. In the ____________________ cost accounting system, costs for materials, labor, and manufacturing overhead are charged to the Work in Process Inventory accounts of the producing departments. process
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
20. In the process cost accounting system, the ____________________ of the ending work in process is estimated. stage of completion
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
21. Costs of ____________________ departments are allocated as manufacturing overhead to the producing departments that benefit. service
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Easy Topic: Process Cost Accounting System
28-34
Chapter 28 - Process Cost Accounting
22. A cost of production report usually contains a(n) ____________________ schedule and a cost schedule. quantity
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-02 Prepare a cost of production report with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
23. Equivalent production units must be computed separately for materials, labor, and ____________________ whenever the stages of completion for the elements are different. overhead
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
24. When the ____________________ cost method is used to calculate unit costs, the beginning inventory costs are added to the current period costs, and the sum is divided by the equivalent production units. average
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Easy Topic: Work in Process Inventory
28-35
Chapter 28 - Process Cost Accounting
25. The ending balance of a(n) ____________________ Inventory account for a producing department must agree with the amount shown for that department in the cost of production report. Work in Process
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Easy Topic: Work in Process Inventory
26. A process cost accounting system may be viewed as a monthly ____________________ cost system. average
AACSB: Analytic AICPA BB: Industry Bloom's: Remember Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
27. On a cost of production report, the ____________________ total cost must equal the total costs accounted for. cumulative
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-02 Prepare a cost of production report with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
28-36
Chapter 28 - Process Cost Accounting
28. Materials issued to production are recorded by ____________________ the departmental work in process accounts. debiting
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Easy Topic: Process Cost Accounting System
29. At the end of the month, the entry to close the Manufacturing Overhead control account includes a ____________________ to Manufacturing Overhead. credit
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Easy Topic: Process Cost Accounting System
30. When finished goods are sold, the entry to record the cost of goods sold includes a ____________________ to the Cost of Goods Sold account. debit
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Easy Topic: Process Cost Accounting System
28-37
Chapter 28 - Process Cost Accounting
Multiple Choice Questions
31. During one month, 3,000 units of a product were completed and 800 units were 20 percent complete and still in process. The equivalent production for the month is A. 3,800 units. B. 4,000 units. C. 3,040 units. D. 3,160 units. 3,000 + (800 x 20%).
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
32. The ending Work in Process inventory in the mixing department contains 300 units that are 70% complete with respect to labor costs. How many equivalent units are in the ending inventory? A. 300 units. B. 140 units. C. 70 units. D. 210 units.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
28-38
Chapter 28 - Process Cost Accounting
33. Process cost accounting is most appropriate A. when there is continuous production on a single product. B. when a company produces more than one product in batches rather than on a continuous basis. C. for companies with either continuous or batch processing of different products. D. for all manufacturing companies.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
34. A firm had 600 units in its work in process inventory at the beginning of a month. Of these units, 30 percent were complete with respect to labor, materials, and overhead. The firm transferred 5,000 units to the finished goods inventory during the month. It had 500 units of which 40 percent were complete and still in process at the end of the month. Equivalent production for the month was A. 5,680 units. B. 5,380 units. C. 5,200 units. D. 5,180 units. 5000 + (500 x 40%).
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
28-39
Chapter 28 - Process Cost Accounting
35. McGill Manufacturing had 900 units in its work in process inventory at the beginning of a month. Of these units, 40 percent were complete with respect to labor, and 100% complete with respect to materials, and overhead. The firm transferred 4,000 units to the finished goods inventory during the month. It had 600 units of which 30 percent were complete and still in process at the end of the month. Equivalent production for the month was A. 4,600 units. B. 4,420 units. C. 4,240 units. D. 4,180 units. 4000 + (600 x 30%).
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
36. A firm had a beginning work in process inventory totaling $4,000 and current period costs of $22,500. Equivalent production was 5,000 units, and 3,000 units were completed and transferred to the finished goods inventory. Inventory costs would be determined using a unit cost of A. $8.83. B. $5.30. C. $4.50. D. $7.50. (4,000 + 22,500)/5,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-03 Compute the unit cost of manufacturing under the process cost accounting system. Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System Topic: Work in Process Inventory
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37. Simon Productions Company had a beginning work in process inventory totaling $6,000. During the current period, the company added materials costs of $12,300, labor cost of $14,500 and overhead of $18,200. Equivalent production was 12,000 units, and 9,000 units were completed and transferred to the finished goods inventory. Inventory costs would be determined using a unit cost of A. $5.67. B. $3.75. C. $4.25. D. $8.50. (6,000 +12,300 + 14,500 + 18,200)/12,000 = 4.25.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-03 Compute the unit cost of manufacturing under the process cost accounting system. Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System Topic: Work in Process Inventory
38. A department transferred 7,000 units to the finished goods storeroom during a month. There was no beginning work in process inventory, but 500 units were still in process at the end of the month. Equivalent production for the month was 7,400 units, and production costs incurred totaled $16,800. Inventory costs would be determined using a unit cost of A. $2.27. B. $2.40. C. $2.24. D. $2.58. 16,800/7,400
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-03 Compute the unit cost of manufacturing under the process cost accounting system. Level: Medium Topic: Process Cost Accounting System
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39. The Painting Department transferred 6,000 units to the finished goods storeroom during a month. There was no beginning work in process inventory, but 800 units were still in process at the end of the month, and were 70% complete, and production costs incurred totaled $21,320. Inventory costs would be determined using a unit cost of A. $3.55. B. $3.42. C. $3.25. D. $3.14.
Equivalent unit = 6,000 + (800 x 70%) = 6560. Unit cost = 21,320/6560 = 3.25. AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-03 Compute the unit cost of manufacturing under the process cost accounting system. Level: Medium Topic: Process Cost Accounting System
40. The Completion Department transferred 8,000 units to the finished goods storeroom during a month. There was no beginning work in process inventory, but 1,000 units were still in process at the end of the month, and were 40% complete. Inventory costs at the end of the month were $3.50. What were total production costs for the month? A. $28,000. B. $29,400. C. $30,100. D. $31,500. (8,000 + (1,000 x 40%)) x 3.50.
AACSB: Analytic Bloom's: Apply Learning Objective: 28-03 Compute the unit cost of manufacturing under the process cost accounting system. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
41. A firm had no work in process at the beginning of a month. It transferred 4,000 units to finished goods during the month, and 500 units were still in process at the end of the month. Equivalent production for the month was 4,400 units. At what stage of completion were the unfinished units at the end of the month? A. 67 percent B. 75 percent C. 20 percent D. 80 percent (4,400 - 4,000)/500.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
42. Fraser Manufacturing had no work in process at the beginning of a month. It transferred 6,000 units to finished goods during the month, and 800 units were still in process at the end of the month. Equivalent production for the month was 6,480 units. At what stage of completion were the unfinished units at the end of the month? A. 60 percent B. 40 percent C. 30 percent D. 80 percent (6,480 - 6,000)/800.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
43. Unit Manufacturing Company had no work in process at the beginning of a month. At the end of the month, 600 units were still in process at the end of the month, and were 40% complete. Equivalent production for the month was 5,240 units. How many units were transferred out of production to finished goods during the month? A. 5,240 units. B. 5,000 units. C. 4,760 units. D. 4,400 units. 5,240 - (600 x 40%).
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
44. Equivalent production units may be computed A. for labor only. B. for labor and materials only. C. for labor, materials, and manufacturing overhead. D. for materials and manufacturing overhead only.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
45. In a process cost accounting system, the average unit cost of a product is determined by dividing the appropriate costs by A. the number of units placed in production during the period. B. the number of units transferred to another department. C. the equivalent production units. D. the number of units transferred to the finished goods inventory.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Easy Topic: Work in Process Inventory
46. The source of the cost data that appears in a cost of production report is A. the Finished Goods Inventory account. B. the job order cost sheet. C. the prior period income statement. D. the Work in Process Inventory accounts.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Easy Topic: Process Cost Accounting System
47. In a process cost accounting system, A. the Finished Goods Inventory account is debited for the cost of completed units any time during the month. B. the Work in Process Inventory accounts are used to accumulate the costs for labor, materials, and manufacturing overhead. C. manufacturing overhead is not included in the determination of inventory costs. D. inventory costs are calculated when goods are sold.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Easy Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
48. On a cost of production report, beginning work in process A. is included in the quantity to be accounted for. B. is included in the quantity accounted for. C. is not included on the report. D. appears on the job cost sheet only.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Easy Topic: Work in Process Inventory
49. The entry to transfer costs from Department A to Department B is recorded as A. a debit to Finished Goods Inventory and a credit to Work in Process—Dept. A. B. a debit to Work in Process—Dept. B and a credit to Work in Process—Dept. A. C. a debit to Work in Process—Dept. A and a credit to Work in Process—Dept. B. D. a debit to Work in Process—Dept. A and a credit to Finished Goods Inventory.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Easy Topic: Process Cost Accounting System
50. When finished goods are sold, the entry to record the cost of goods sold includes A. a debit to Finished Goods Inventory and a credit to Cost of Goods Sold. B. a debit to Cost of Goods Sold and a credit to Sales. C. a debit to Cost of Goods Sold and a credit to Finished Goods Inventory. D. a debit to Finished Goods Inventory and a credit to Sales.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Easy Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
51. At the end of the month, the entry to close the Manufacturing Overhead control account is recorded as A. a debit to Manufacturing Overhead Applied and a credit to Manufacturing Overhead. B. a debit to Work in Process Inventory accounts and a credit to Manufacturing Overhead. C. a debit to Manufacturing Overhead and a credit to the Work in Process inventory accounts. D. a debit to Manufacturing Overhead and a credit to Manufacturing Summary.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Easy Topic: Process Cost Accounting System
52. During the month, 1,600 units of a product were completed and 900 units were two-thirds complete with respect to labor and still in process. The total equivalent units of production for labor for the month is A. 2,200 units. B. 2,400 units. C. 2,500 units. D. 2,600 units. 1,600 + 600.
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
53. During the month, 2,700 units of a product were completed and 800 units were 60% complete with respect to labor and still in process. The total equivalent units of production for labor for the month is A. 2,700 units. B. 2,400 units. C. 3,180 units. D. 4,320 units. 2,700 + (800 x 60%).
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
54. The two sections of the cost of production report are A. the total to be accounted for and the total accounted for. B. the costs assigned to the goods transferred out and the costs assigned to the goods still in process. C. the summary of quantities and the summary of costs. D. beginning inventory plus goods started and goods transferred out and ending inventory.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-02 Prepare a cost of production report with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
55. Each section of the production report has two parts. They reconcile A. the total to be accounted for and the total accounted for. B. the beginning inventory plus units started and the units started and completed and the ending inventory. C. the costs in beginning work in process and the costs added during the period. D. the beginning inventory and the ending inventory.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-02 Prepare a cost of production report with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
56. The total accounted for consists of A. the units started in production. B. the units transferred out and the units in ending work in process. C. the units started and the units transferred out. D. the units transferred out and the units completed.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-02 Prepare a cost of production report with no beginning work in process inventory. Level: Easy Topic: Process Cost Accounting System
57. The headings for the columns of the Cost Schedule section of the Production Report when there is no beginning inventory are A. Total Cost and Unit Cost. B. Total Cost and E.P. Units. C. E.P. Units and Unit Cost. D. Total Cost, E.P. Units, and Unit Cost.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-03 Compute the unit cost of manufacturing under the process cost accounting system. Level: Easy Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
58. The part of the Cost Schedule showing the total and unit cost of each element and the cumulative cost total is the A. total costs transferred out. B. costs accounted for. C. costs to be accounted for. D. total work in process.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-03 Compute the unit cost of manufacturing under the process cost accounting system. Level: Easy Topic: Process Cost Accounting System
59. Total costs accounted for consists of the A. cumulative cost plus the work in process—ending costs. B. total costs transferred out less the total work in process—ending costs. C. cumulative cost plus total costs transferred out. D. total costs transferred out plus the total work in process—ending costs.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-03 Compute the unit cost of manufacturing under the process cost accounting system. Level: Easy Topic: Process Cost Accounting System
60. Rounding is often necessary to make the Production Report cumulative cost total agree to the total costs accounted for. In the following periods, the amount of the adjustment is either added to or subtracted from the _____________ in work in process. A. direct materials B. direct labor C. manufacturing overhead D. credit entry
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-03 Compute the unit cost of manufacturing under the process cost accounting system. Level: Easy Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
61. The current department costs categories are A. work in process—beginning costs, started in production costs, and transferred in costs. B. materials costs, labor costs, and manufacturing overhead costs. C. work in process—beginning costs, transferred out to next department costs, and work in process—ending costs. D. started in production costs, transferred in from prior department costs, and transferred out to next department costs.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Easy Topic: Work in Process Inventory
62. When beginning inventory is part of the production report, costs from the prior department are included. They are A. the beginning inventory amount and the costs transferred in. B. the beginning inventory amount. C. the costs transferred in. D. the beginning inventory costs transferred in.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Easy Topic: Work in Process Inventory
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Chapter 28 - Process Cost Accounting
63. The method that combines the cost of beginning inventory and the current costs of the period is the A. market value process costing method. B. method of net realizable value. C. replacement cost method. D. average method of process costing.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Easy Topic: Work in Process Inventory
Short Answer Questions
64. Data about production in Dept. B for June is given below.
1. Compute the equivalent units of production for the prior department costs. 2. Compute the equivalent units of production for materials. 3. Compute the equivalent units of production for labor and overhead. 1. 9,500 units; 2. 10,125 units; 3. 8,375 units
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
65. Data about production in the Processing Department for July is given below.
1. Compute the equivalent units of production for the prior department costs. 2. Compute the equivalent units of production for materials. 3. Compute the equivalent units of production for labor and overhead. 1. 17,000 units; 2. 13,500 units; 3. 13,000 units
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
66. On July 1, 2013, there was no beginning inventory in Dept. A, the first department. During the month, production was started on 3,000 units. The total cost of materials was $18,000. All materials were placed in production at the start of the manufacturing process in the department. During the month, 2,400 units were transferred to the next department. There were 600 units still in process at the end of the month. 1. What is the cost per equivalent unit for materials? 2. What is the cost of materials in the goods transferred to the next department? 3. What is the cost of materials in the ending work in process inventory? 1. $6; 2. $14,400; 3. $3,600
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Learning Objective: 28-03 Compute the unit cost of manufacturing under the process cost accounting system. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
67. On October 1, 2012, there was no beginning inventory in the Bottling Department. During the month, production was started on 7,400 units. The total cost of materials was $29,600. All materials were placed in production at the start of the manufacturing process in the department. During the month, 5,800 units were transferred to the next department. There were 1,600 units still in process at the end of the month. 1. What is the cost per equivalent unit for materials? 2. What is the cost of materials in the goods transferred to the next department? 3. What is the cost of materials in the ending work in process inventory? 1. $4; 2. $23,200; 3. $6,400
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Learning Objective: 28-03 Compute the unit cost of manufacturing under the process cost accounting system. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
The Vinh Corporation has two producing departments. Cost data from the firm's records for the month of January 2013 is given below. There were no beginning inventories.
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Chapter 28 - Process Cost Accounting
68. Prepare equivalent production computations for each department.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
69. Prepare a cost of production report for the Fabricating Department.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-02 Prepare a cost of production report with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
70. Prepare a cost of production report for the Assembling Department.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-02 Prepare a cost of production report with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
71. In Gerth Manufacturing, production is started in the fabricating department. The work is then transferred to the finishing department where goods are completed and then transferred to the finished goods storeroom. Data about the company's costs during February 2013 are given below.
During the month, products costing $45,000 were transferred from the fabricating department to the finishing department; goods costing $56,000 were transferred from the finishing department to finished goods inventory; and goods that cost $63,000 were sold on account for $79,000. Record the following events on page 3 of a general journal. Use February 28 as the date. Omit descriptions. (a.) Place materials into production (b.) Charge labor costs into production (c.) Charge overhead costs into production (d.) Transfer product from fabricating department to finishing department (e.) Transfer finished goods from finishing department to finished goods inventory (f.) Sale of goods (g.) Record cost of goods sold
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Chapter 28 - Process Cost Accounting
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
Cost data for a firm's first department, Dept. A, for June 2013 is given below.
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72. Prepare equivalent production computations for Dept. A from the information provided.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Medium Topic: Work in Process Inventory
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Chapter 28 - Process Cost Accounting
73. Prepare a cost of production report for the month of June from the information given.
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Chapter 28 - Process Cost Accounting
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Medium Topic: Work in Process Inventory
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Chapter 28 - Process Cost Accounting
74. Jocose Company recorded the following journal entries. Write a description for each numbered journal entry. Number your descriptions to match the journal entry numbers.
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(1) Materials were entered into production (2) Salaries and wages for March were recorded (3) Manufacturing overhead was charged to work in process (4) Production costs transferred out of the assembly department (5) The cost of units completed were transferred to FGI (6) Sales on credit (7) Cost of sales removed from FGI
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Medium Topic: Process Cost Accounting System
75. Kobold Company manufactures lamps. In May, Department B started 4,500 units. None had been transferred in from a prior department. Of the 4,500 units started, 4,250 were transferred out—3,850 to the next department, Department C, and 400 were transferred to Finished Goods. All the materials issued during May were used in production while only 70% of the labor and overhead was added to the ending inventory. Calculate the equivalent units for material and for the labor and manufacturing overhead.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
76. Jocund Manufacturing produces exercise machines. In February, all the materials issued to Department X were entered into production. There was no beginning inventory. Department X started 6,100 units. During February, 5,300 units were transferred out—4,750 to Department Y and 550 to Finished Goods. Of the 900 units in ending inventory, 65% of the labor and overhead had been added during the month. Calculate the equivalent units of production for material and for Labor and Manufacturing Overhead.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
77. Fill in the blanks in the Quantity Section of the following Production Report.
All answers are in bold and in italics
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Chapter 28 - Process Cost Accounting
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
78. Fill in the blanks in the Quantity Section of the following Production Report.
Answers are in bold and in italics.
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Chapter 28 - Process Cost Accounting
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
79. Calculate the equivalent production units from the information given.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Medium Topic: Work in Process Inventory
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Chapter 28 - Process Cost Accounting
80. Prepare the Quantity Schedule for Department J for October 2013 in good format from the information given.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Medium Topic: Work in Process Inventory
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Chapter 28 - Process Cost Accounting
81. Complete the Cost Schedule for Department J from the information given.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
82. Using the information given, what are the quantity to account for, the quantity accounted for, and the equivalent production units for the month of November for Department R? The quantity to account for and the quantity accounted for are both 6,700. The equivalent production units for materials are 6,700 and for both labor and overhead they are 6,280.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-01 Compute equivalent units of production with no beginning work in process inventory. Learning Objective: 28-02 Prepare a cost of production report with no beginning work in process inventory. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
83. Complete the Cost of Production Report for Department R for November from the information given.
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AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 28-02 Prepare a cost of production report with no beginning work in process inventory. Learning Objective: 28-03 Compute the unit cost of manufacturing under the process cost accounting system. Level: Medium Topic: Process Cost Accounting System
84. Explain the flow of production in a manufacturing environment for production as the products are started and moved through the production process and eventually sold. Include the account titles. The materials for production are transferred to the proper department's Work in Process account from the Raw Materials Inventory account. Labor on the units being produced is recorded as incurred and charged to the department Work in Process account. The overhead is also debited to the Work in Process from the Manufacturing Overhead Control account. Once work on the products in that department is completed, the Work in Process account is credited and the Work in Process account for the next department or the Finished Goods Inventory account is debited. When the products are sold, Accounts Receivable is debited and Sales is credited for the sale price. At that time, Cost of Goods Sold is debited and Finished Goods Inventory is credited for the cost amount.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 28-04 Record costs incurred and the flow of costs as products move through the manufacturing process and are sold. Level: Medium Topic: Process Cost Accounting System
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Chapter 28 - Process Cost Accounting
Matching Questions
85. Match the following definitions to the term that they relate to. 1. Costs of units transferred out plus the cost of the ending work in process units 2. All manufacturing costs not classified as direct materials or direct labor 3. Estimated number of units that could have been started and completed with the same effort and costs incurred in the department during the same time period 4. Cumulative cost total 5. The total of the number of units sold times the average cost for each 6. Summarizes total units to be accounted for and total units accounted for 7. The units completed but not yet sold 8. Units begun but not yet completed 9. All departmental manufacturing costs divided by the production for the period 10. Summarizes total costs to be accounted for and total costs accounted for
unit cost 9 manufacturing overhead 2 costs accounted for 1 work in process 8 equivalent units 3 costs to be accounted for 4 finished goods 7 cost schedule 10 cost of goods sold 5 quantity schedule 6
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 28-02 Prepare a cost of production report with no beginning work in process inventory. Learning Objective: 28-05 Compute equivalent production and prepare a cost of production report with a beginning work in process inventory. Learning Objective: 28-06 Define the accounting terms new to this chapter. Level: Easy Topic: Process Cost Accounting System Topic: Work in Process Inventory
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
Chapter 29 Controlling Manufacturing Costs: Standard Costs True / False Questions
1. If the standard cost for an item exceeds the actual cost, the variance is favorable. True False
2. If a price variance for materials is unfavorable, the quantity variance for materials also must be unfavorable. True False
3. If the predetermined overhead application rate is a percentage of labor cost, then a favorable labor time variance will be accompanied by a favorable manufacturing overhead variance. True False
4. Direct materials and direct labor are examples of costs that tend to vary directly with the volume of output. True False
5. A price variance for an item is the difference between its actual price and its standard price multiplied by the standard quantity. True False
6. The cost per unit of direct materials changes as output changes. True False
7. As the volume of output decreases, the fixed cost per unit of output increases. True False
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
8. Semi-variable costs vary in direct proportion to the volume of activity. True False
9. Semi-variable costs are sometimes called mixed costs. True False
10. In order to analyze the differences between actual costs and standard costs, it is necessary to identify the fixed and variable components of semi-variable costs. True False
11. A fixed budget includes only fixed manufacturing costs. True False
12. A key purpose of a manufacturing cost budget is to provide a basis for measuring performance. True False
13. A budget performance report compares actual costs for a period with the budgeted costs for that period. True False
14. A flexible budget shows budgeted costs at several different levels of activity. True False
15. Usually, a well-run manufacturing company prepares only annual manufacturing cost budgets. True False
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
16. Standard costs reflect what costs should be for the units of product manufactured during the period under the normal efficient operating conditions. True False
17. The purchasing department can determine the standard quantity per unit of each type of raw material required to manufacture a product. True False
18. The setting of standard wage rates is usually a function of the personnel department. True False
19. The high-low point method results can be misleading if the months used are the highest and lowest production levels of the year. True False
20. The controllable overhead variance compares the actual overhead costs incurred with what the costs should have been for the units produced. True False
Fill in the Blank Questions
21. The difference between the actual cost of an item and its standard cost is called a(n) ___________________. ________________________________________
22. If the actual cost of an item is lower than the standard cost, a(n) ____________________ price variance will be recognized. ________________________________________
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
23. The quantity variance for an item is the difference between its actual quantity and its standard quantity, multiplied by the ____________________ cost of the item. ________________________________________
24. The price variance for an item is the difference between its actual price and its standard price, multiplied by the ____________________ quantity. ________________________________________
25. Costs that do not vary in total during a period even though the volume of manufacturing activity changes are called ____________________ costs. ________________________________________
26. Costs that tend to change in total directly with the volume of manufacturing activity are called ____________________ costs. ________________________________________
27. The ____________________ cost per unit does not change as output changes. ________________________________________
28. As the volume of output increases, the ____________________ cost per unit of output decreases. ________________________________________
29. Costs that vary in some degree with the volume of activity, but not in direct proportion to it are called ____________________ costs. ________________________________________
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
30. A simple method used to analyze the fixed and variable components in semivariable costs is called the ____________________ point method. ________________________________________
31. A budget that shows expected costs at only one level of production activity is called a(n) ____________________ budget. ________________________________________
32. A budget that shows expected costs at more than one level of activity is called a(n) ____________________ budget. ________________________________________
33. The range of activity at which the factory is likely to operate is referred to as the ____________________ range of activity. ________________________________________
34. Costs that reflect what costs should be for the units of product manufactured during the period under normal efficient operating conditions are called ____________________ costs. ________________________________________
35. The labor time (efficiency) variance and the labor ____________________ variance together make up the total labor variance. ________________________________________
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
Multiple Choice Questions
36. To separate the semi-variable costs into their fixed and variable components, one can use which of the following methods? A. labor variance method B. material variance method C. relevant range of activity method D. high-low point method
37. Deducting the total variable cost from the total cost results in A. overhead. B. fixed cost. C. manufacturing cost. D. semivariable cost.
38. Which of the following costs are generally semi-variable? A. clerical salaries B. depreciation C. repairs and maintenance D. property taxes
39. Use the high-low point method to determine total fixed cost: A. $20,000. B. $28,000. C. $16,000. D. $24,000.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
40. Use the high-low point method to determine variable cost per unit: A. $0.60 per unit. B. $0.80 per unit. C. $1.00 per unit. D. $1.20 per unit.
41. Use the high-low point method to determine total costs if 16,000 units are produced. A. $20,000 B. $22,800 C. $30,000 D. $32,800
42. A fixed budget is a meaningful way to evaluate manufacturing performance if the activity level used for the budget is A. similar to actual. B. less than actual. C. more than actual. D. a reasonable/logical activity measure.
43. A budget prepared using several differing levels of activity is a A. fixed budget. B. flexible budget. C. manufacturing cost budget. D. budget performance report.
44. The labor standard for a product was five hours at a wage rate of $8 per hour. The firm produced 900 units of the item. Labor costs totaled $35,250 and 4,700 hours of labor were used. An analysis of labor costs would indicate A. a $750 favorable labor time variance. B. a $1,600 unfavorable labor time variance. C. a $750 unfavorable labor rate variance. D. a $1,600 favorable labor rate variance.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
45. The quantity variance for an item is the difference between its actual quantity and its standard quantity multiplied by A. the standard cost of the item. B. the actual cost of the item. C. the price variance. D. the budgeted amount for the item.
46. An unfavorable price variance for materials means that A. the actual cost of the materials was more than the budgeted amount. B. more materials were used in production than anticipated. C. more labor hours were required to work with the materials than expected. D. the actual cost of the materials was more than the standard cost.
47. Direct factory labor is usually considered to be A. a variable cost. B. a fixed cost. C. a semi-variable cost. D. a mixed cost.
48. The materials price variance for an item is the difference between its actual price and its standard cost A. multiplied by the actual quantity used. B. multiplied by the standard quantity allowed. C. multiplied by the difference between the actual quantity and the standard quantity. D. divided by the actual quantity.
49. The cost of utilities consumed in the factory is a good example of A. a variable cost. B. a fixed cost. C. a semi-variable cost. D. a standard cost.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
50. The salary of the factory supervisor is a good example of A. a variable cost. B. a fixed cost. C. a semi-variable cost. D. a standard cost.
51. As the level of activity increases, the fixed cost per unit of activity A. increases. B. decreases. C. does not change. D. may increase or decrease.
52. As the level of activity increases, the variable cost per unit of activity A. increases. B. decreases. C. does not change. D. may increase or decrease.
53. As the level of activity increases, the total variable costs for the period A. increase. B. decrease. C. do not change. D. may increase or decrease.
54. As the level of activity increases, the total fixed costs for the period A. increase. B. decrease. C. may increase or decrease. D. do not change.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
55. Costs that reflect what costs should be for the units of product manufactured during the period under normal efficient operating conditions are known as A. variable costs. B. fixed costs. C. standard costs. D. semi-variable costs.
56. In a factory, the fixed costs per unit are $45 when 400 units are produced. If 450 units are produced, the fixed costs per unit would be A. $45.00. B. $40.00. C. $10.00. D. $50.63.
57. In a factory, the fixed costs are $6,000 when 600 units are produced. If 900 units are produced, the fixed costs per unit would be A. $10.00. B. $9.00. C. $7.50. D. $6.67.
58. In a factory, the total variable costs are $600 if 500 units are produced. If 400 units are produced, the total variable costs would be A. $480. B. $600. C. $120. D. $333.
59. In a factory, the total variable costs are $600 if 500 units are produced. If 800 units are produced, the variable cost per unit would be A. $1.20 B. $1.11 C. $1.00 D. $0.75
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
60. The standard quantity of materials for a product was 40 pounds per unit at the standard price of $2.00 per pound. The actual price per pound of materials was $1.50, and the actual quantity used was 44 pounds. An analysis would indicate A. a $20.00 favorable price variance. B. a $22.00 favorable price variance. C. a $6.00 unfavorable quantity variance. D. a $18.00 favorable price variance.
61. The standard quantity of materials for a product was 40 pounds per unit at the standard price of $2.00 per pound. The actual price per pound of materials was $1.50, and the actual quantity used was 44 pounds. An analysis would indicate A. a $20.00 favorable price variance. B. a $8.00 favorable quantity variance. C. a $6.00 unfavorable quantity variance. D. a $8.00 unfavorable quantity variance.
62. Efficiency and cost control can be evaluated by comparing actual overhead costs with the budget for the actual level of operations with the A. flexible budget. B. fixed budget. C. budget performance report. D. manufacturing cost budget.
63. One element that is NOT part of the standard cost is A. shipping. B. labor. C. materials. D. machine maintenance.
64. Standard quantity is usually determined by the A. purchasing department. B. engineers. C. company accountant. D. shop foreman.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
65. The difference between the total standard cost and the total actual cost is the A. standard cost card amount. B. labor rate variance. C. materials price variance. D. cost variance.
66. The flexible budget usually shows A. only fixed costs. B. only variable costs. C. fixed and variable costs together. D. fixed and variable costs separately.
The Costmore Company uses standard costing and has established the following standards for direct materials and direct labor for each unit it makes:
During July, the company made 4,000 units of product and used 13,000 gallons. The actual price paid for materials was $5.20 per gallon. Direct Labor used was 3,600 hours and workers were paid $11.75 per hour.
67. An analysis would indicate A. a $5,000 unfavorable materials quantity variance B. a $7,600 favorable materials quantity variance. C. a $2,600 favorable materials quantity variance. D. a $7,600 unfavorable materials quantity variance.
68. An analysis would indicate A. a $900 unfavorable labor rate variance. B. a $900 favorable labor rate variance. C. a $4,800 unfavorable labor rate variance. D. a $4,80 favorable labor rate variance.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
69. An analysis would indicate A. a $900 unfavorable labor efficiency variance. B. a $900 favorable labor efficiency variance. C. a $4,800 unfavorable labor efficiency variance. D. a $4,800 favorable labor efficiency variance.
Short Answer Questions
70. Vista Company's records show the following information for the first six months of 2013.
1. What are the variable costs per hour using the high-low point method? 2. What are the fixed costs per month using the high-low point method?
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
71. The company's accountant developed the data given below for Product X for the year 2013. Use this information to compute the answers to the questions that follow.
1. What is the standard cost per unit of product for materials? 2. What is the standard cost per unit of product for labor? 3. What is the standard cost per unit of product for overhead? 4. What is the total standard cost per unit of product?
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
72. The standard costs for a unit of product are shown below.
During July, Job N-5 for 200 units was completed. The actual costs of the job are shown below.
1. What is the total cost variance between actual cost and standard cost? 2. What is the total material variance? 3. What is the material quantity variance? 4. What is the material price variance?
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
73. The standard costs for a unit of product are shown below.
During June, Job N-5 for 100 units was completed. The actual costs of the job are shown below.
1. What is the total cost variance between actual cost and standard cost? 2. What is the total material variance? 3. What is the material quantity variance? 4. What is the material price variance?
Kenwood Company's manufacturing overhead costs for the assembly department are given below.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
74. Using the information provided, prepare a flexible budget for the department for the month of May 2013, assuming that the expected production is for 2,000 direct labor hours. The flexible budget should show costs for production levels of 90 percent and 110 percent of the expected production level of 2,000 hours.
75. Using the information provided prepare a departmental monthly overhead performance report comparing actual costs with the budget allowance for the number of hours worked. Assume that during the month of May actual production was 1,900 hours. Actual costs for the month were as follows:
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
76. Determine the cost behavior for each of the following items as Fixed (F), Variable (V), or Semi-variable (S).
77. The three classifications for manufacturing costs are fixed, variable, and semivariable. Explain what each is and how they relate to production.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
78. Prepare a budget for manufacturing costs for Nacelle Manufacturing for the month of July 2013 from the following information. Direct materials are estimated to be $480,000 for the year and direct labor is estimated to be $96,000. The direct labor per hour average is $13 and the budgeted level of activity for the month is 1,200 hours.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
79. Prepare a budget for manufacturing costs for Anasta Manufacturing for the month of April 2013 from the following information. Direct materials are estimated to be $600,000 for the year and direct labor is estimated to be $108,000. The direct labor per hour average is $16 and the budgeted level of direct labor activity for the month is 1,100 hours.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
80. Complete the flexible budget of manufacturing costs for Lansome Industries for September 2013. Overhead is based on direct labor hours.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
81. Complete the flexible budget for Cullville Industries for April 2013. Overhead is based on direct labor hours.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
82. Complete the Budget Performance Report for Soville Manufacturing using the information given. Comment on the results.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
83. Complete the Budget Performance Report for Soville Manufacturing. Create a flexible budget by adding a budget column at the actual number of labor hours. Compare the actual to the flexible budget numbers you calculated.
84. Develop the standard costs from the information given. Morlee Corporation makes three models of storage sheds. Model JB102 a 10' by 12' model that looks Victorian with windows, shutters and gingerbread along the roof line, is Morlee's most popular model. Direct materials for the JB102 consists of $66.00 for 7 sheets of pressed board, $59.00 for 2 x 4's for framing, $22.00 for roofing shingles, and $17.00 for aluminum siding. The nails, glue and other indirect materials for the company total $38,880 per year and are applied based on direct labor hours. The total direct labor hours for Morlee for one year are estimated to be 8,000 per year. Direct labor for each JB 102 is estimated to be 7 hours. The average hourly rate at Morelee is $14.50. Prepare a standard cost card for Model JB102. Units and per unit amount for material can be omitted.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
85. The Hoatzin Birdhouse Factory produced the following standard cost card. In July, the company had an order for 500 birdhouses (Model: Wren) for Job No. CB32. Manufacturing overhead is based on direct labor hours. The manufacturing overhead cost estimates for the year total $32,400 and total direct labor hours are estimated at 9,000 for the year. Complete the Standard Cost Card and Job Order Cost Sheet. Calculate the total cost variance.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
Canine Cottage Industries makes several specially designed doghouses. The Standard Cost Card for The Gables model is shown. A customer ordered three of this model for their Labrador retrievers. The Job Cost Sheet is shown.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
86. From the information given for Canine Cottage Industries, compute the materials, quantity and price variances.
87. From the information given for Canine Cottage Industries, compute the labor total, time and rate variances.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
Matching Questions
88. Match the following descriptions with the appropriate term.
1. An operating plan expressed in monetary units 2. Used to determine the fixed and variable components of a semivariable cost 3. A budget representing only one level of activity 4. A comparison of actual costs and budgeted costs 5. Costs that vary with, bust not in direct proportion to, the volume of activity 6. A budget made for each manufacturing cost 7. Costs that do not change in total as the level of activity changes 8. The different levels of activity at which a factory is expected to operate 9. Costs that vary in total in direct proportion to changes in the level of activity 10. A budget that shows the budgeted costs at various levels of activity
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Budget performance report ____ Fixed budget ____ Budget ____ Flexible budget ____ Manufacturing cost budget ____ Semi-variable costs ____ Fixed costs ____ High-low point method ____ Relevant range of activity ____ Variable costs ____
Chapter 29 - Controlling Manufacturing Costs: Standard Costs
89. Match the following descriptions with the appropriate term.
1. Labor time variance 2. The difference between the actual price and the standard cost for materials multiplied by the actual quantity of materials used 3. The difference between the actual hours worked and the standard labor hours allowed for the job multiplied by the standard cost per hour 4. The difference between the actual labor rate per hour and the standard labor rate per hour multiplied by the actual number of hours worked on the job
Materials usage variance ____
Cost variance ____ Labor efficiency variance ____ Materials price variance ____ Labor time variance ____ Standard cost card ____
5. Materials quantity variance 6. Shows the per unit standard costs for materials, labor, and overhead 7. The difference between the actual quantity used and the quantity of materials allowed multiplied by the Variance standard cost of the materials analysis ____ 8. The difference between actual and standard overhead Overhead costs variance ____ 9. The difference between the total standard cost and the Labor rate total actual cost variance ____ 10. Explains the difference between standard cost and Materials actual cost quantity variance ____
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
Chapter 29 Controlling Manufacturing Costs: Standard Costs Answer Key
True / False Questions
1. If the standard cost for an item exceeds the actual cost, the variance is favorable. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-06 Compute the standard costs of products manufactured during the period and determine cost variances between actual costs and standard costs. Level: Easy Topic: Standard Costs as a Control Tool
2. If a price variance for materials is unfavorable, the quantity variance for materials also must be unfavorable. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Easy Topic: Standard Costs as a Control Tool
3. If the predetermined overhead application rate is a percentage of labor cost, then a favorable labor time variance will be accompanied by a favorable manufacturing overhead variance. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Easy Topic: Standard Costs as a Control Tool
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
4. Direct materials and direct labor are examples of costs that tend to vary directly with the volume of output. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
5. A price variance for an item is the difference between its actual price and its standard price multiplied by the standard quantity. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Easy Topic: Standard Costs as a Control Tool
6. The cost per unit of direct materials changes as output changes. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
7. As the volume of output decreases, the fixed cost per unit of output increases. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
8. Semi-variable costs vary in direct proportion to the volume of activity. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
9. Semi-variable costs are sometimes called mixed costs. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
10. In order to analyze the differences between actual costs and standard costs, it is necessary to identify the fixed and variable components of semi-variable costs. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
11. A fixed budget includes only fixed manufacturing costs. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-03 Prepare a fixed budget for manufacturing costs. Level: Easy Topic: Cost Behavior and the Budget
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
12. A key purpose of a manufacturing cost budget is to provide a basis for measuring performance. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 29-03 Prepare a fixed budget for manufacturing costs. Level: Easy Topic: Cost Behavior and the Budget
13. A budget performance report compares actual costs for a period with the budgeted costs for that period. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-03 Prepare a fixed budget for manufacturing costs. Level: Easy Topic: Cost Behavior and the Budget
14. A flexible budget shows budgeted costs at several different levels of activity. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-04 Develop a flexible budget for manufacturing costs. Level: Easy Topic: Cost Behavior and the Budget
15. Usually, a well-run manufacturing company prepares only annual manufacturing cost budgets. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-03 Prepare a fixed budget for manufacturing costs. Level: Easy Topic: Cost Behavior and the Budget
29-34
Chapter 29 - Controlling Manufacturing Costs: Standard Costs
16. Standard costs reflect what costs should be for the units of product manufactured during the period under the normal efficient operating conditions. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-05 Develop standard costs per unit of product. Level: Easy Topic: Standard Costs as a Control Tool
17. The purchasing department can determine the standard quantity per unit of each type of raw material required to manufacture a product. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Easy Topic: Standard Costs as a Control Tool
18. The setting of standard wage rates is usually a function of the personnel department. TRUE
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 29-05 Develop standard costs per unit of product. Level: Easy Topic: Standard Costs as a Control Tool
19. The high-low point method results can be misleading if the months used are the highest and lowest production levels of the year. FALSE
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-02 Use the high-low point method to determine the fixed and variable components of a semivariable cost. Level: Easy Topic: Cost Behavior and the Budget
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
20. The controllable overhead variance compares the actual overhead costs incurred with what the costs should have been for the units produced. TRUE
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Easy Topic: Standard Costs as a Control Tool
Fill in the Blank Questions
21. The difference between the actual cost of an item and its standard cost is called a(n) ___________________. variance
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-06 Compute the standard costs of products manufactured during the period and determine cost variances between actual costs and standard costs. Level: Easy Topic: Standard Costs as a Control Tool
22. If the actual cost of an item is lower than the standard cost, a(n) ____________________ price variance will be recognized. favorable
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-06 Compute the standard costs of products manufactured during the period and determine cost variances between actual costs and standard costs. Level: Easy Topic: Standard Costs as a Control Tool
29-36
Chapter 29 - Controlling Manufacturing Costs: Standard Costs
23. The quantity variance for an item is the difference between its actual quantity and its standard quantity, multiplied by the ____________________ cost of the item. standard
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Easy Topic: Standard Costs as a Control Tool
24. The price variance for an item is the difference between its actual price and its standard price, multiplied by the ____________________ quantity. actual
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Easy Topic: Standard Costs as a Control Tool
25. Costs that do not vary in total during a period even though the volume of manufacturing activity changes are called ____________________ costs. fixed
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
29-37
Chapter 29 - Controlling Manufacturing Costs: Standard Costs
26. Costs that tend to change in total directly with the volume of manufacturing activity are called ____________________ costs. variable
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
27. The ____________________ cost per unit does not change as output changes. variable
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
28. As the volume of output increases, the ____________________ cost per unit of output decreases. fixed
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
29. Costs that vary in some degree with the volume of activity, but not in direct proportion to it are called ____________________ costs. semi-variable; mixed
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
29-38
Chapter 29 - Controlling Manufacturing Costs: Standard Costs
30. A simple method used to analyze the fixed and variable components in semivariable costs is called the ____________________ point method. high-low
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-02 Use the high-low point method to determine the fixed and variable components of a semivariable cost. Level: Easy Topic: Cost Behavior and the Budget
31. A budget that shows expected costs at only one level of production activity is called a(n) ____________________ budget. fixed
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-03 Prepare a fixed budget for manufacturing costs. Level: Easy Topic: Cost Behavior and the Budget
32. A budget that shows expected costs at more than one level of activity is called a(n) ____________________ budget. flexible
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-04 Develop a flexible budget for manufacturing costs. Level: Easy Topic: Cost Behavior and the Budget
33. The range of activity at which the factory is likely to operate is referred to as the ____________________ range of activity. relevant
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-04 Develop a flexible budget for manufacturing costs. Level: Easy Topic: Cost Behavior and the Budget
29-39
Chapter 29 - Controlling Manufacturing Costs: Standard Costs
34. Costs that reflect what costs should be for the units of product manufactured during the period under normal efficient operating conditions are called ____________________ costs. standard
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-05 Develop standard costs per unit of product. Level: Easy Topic: Standard Costs as a Control Tool
35. The labor time (efficiency) variance and the labor ____________________ variance together make up the total labor variance. rate
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Easy Topic: Standard Costs as a Control Tool
Multiple Choice Questions
36. To separate the semi-variable costs into their fixed and variable components, one can use which of the following methods? A. labor variance method B. material variance method C. relevant range of activity method D. high-low point method
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 29-02 Use the high-low point method to determine the fixed and variable components of a semivariable cost. Level: Easy Topic: Cost Behavior and the Budget
29-40
Chapter 29 - Controlling Manufacturing Costs: Standard Costs
37. Deducting the total variable cost from the total cost results in A. overhead. B. fixed cost. C. manufacturing cost. D. semivariable cost.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-02 Use the high-low point method to determine the fixed and variable components of a semivariable cost. Level: Easy Topic: Cost Behavior and the Budget
38. Which of the following costs are generally semi-variable? A. clerical salaries B. depreciation C. repairs and maintenance D. property taxes
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-02 Use the high-low point method to determine the fixed and variable components of a semivariable cost. Level: Easy Topic: Cost Behavior and the Budget
29-41
Chapter 29 - Controlling Manufacturing Costs: Standard Costs
39. Use the high-low point method to determine total fixed cost: A. $20,000. B. $28,000. C. $16,000. D. $24,000.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 29-02 Use the high-low point method to determine the fixed and variable components of a semivariable cost. Level: Medium Topic: Cost Behavior and the Budget
40. Use the high-low point method to determine variable cost per unit: A. $0.60 per unit. B. $0.80 per unit. C. $1.00 per unit. D. $1.20 per unit.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 29-02 Use the high-low point method to determine the fixed and variable components of a semivariable cost. Level: Medium Topic: Cost Behavior and the Budget
41. Use the high-low point method to determine total costs if 16,000 units are produced. A. $20,000 B. $22,800 C. $30,000 D. $32,800
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 29-02 Use the high-low point method to determine the fixed and variable components of a semivariable cost. Level: Medium Topic: Cost Behavior and the Budget
29-42
Chapter 29 - Controlling Manufacturing Costs: Standard Costs
42. A fixed budget is a meaningful way to evaluate manufacturing performance if the activity level used for the budget is A. similar to actual. B. less than actual. C. more than actual. D. a reasonable/logical activity measure.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 29-03 Prepare a fixed budget for manufacturing costs. Level: Easy Topic: Cost Behavior and the Budget
43. A budget prepared using several differing levels of activity is a A. fixed budget. B. flexible budget. C. manufacturing cost budget. D. budget performance report.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 29-04 Develop a flexible budget for manufacturing costs. Level: Easy Topic: Cost Behavior and the Budget
44. The labor standard for a product was five hours at a wage rate of $8 per hour. The firm produced 900 units of the item. Labor costs totaled $35,250 and 4,700 hours of labor were used. An analysis of labor costs would indicate A. a $750 favorable labor time variance. B. a $1,600 unfavorable labor time variance. C. a $750 unfavorable labor rate variance. D. a $1,600 favorable labor rate variance.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Medium Topic: Standard Costs as a Control Tool
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45. The quantity variance for an item is the difference between its actual quantity and its standard quantity multiplied by A. the standard cost of the item. B. the actual cost of the item. C. the price variance. D. the budgeted amount for the item.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Easy Topic: Standard Costs as a Control Tool
46. An unfavorable price variance for materials means that A. the actual cost of the materials was more than the budgeted amount. B. more materials were used in production than anticipated. C. more labor hours were required to work with the materials than expected. D. the actual cost of the materials was more than the standard cost.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Easy Topic: Standard Costs as a Control Tool
47. Direct factory labor is usually considered to be A. a variable cost. B. a fixed cost. C. a semi-variable cost. D. a mixed cost.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
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48. The materials price variance for an item is the difference between its actual price and its standard cost A. multiplied by the actual quantity used. B. multiplied by the standard quantity allowed. C. multiplied by the difference between the actual quantity and the standard quantity. D. divided by the actual quantity.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-06 Compute the standard costs of products manufactured during the period and determine cost variances between actual costs and standard costs. Level: Easy Topic: Standard Costs as a Control Tool
49. The cost of utilities consumed in the factory is a good example of A. a variable cost. B. a fixed cost. C. a semi-variable cost. D. a standard cost.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
50. The salary of the factory supervisor is a good example of A. a variable cost. B. a fixed cost. C. a semi-variable cost. D. a standard cost.
AACSB: Analytic AICPA BB: Resource Management Bloom's: Understand Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
51. As the level of activity increases, the fixed cost per unit of activity A. increases. B. decreases. C. does not change. D. may increase or decrease.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
52. As the level of activity increases, the variable cost per unit of activity A. increases. B. decreases. C. does not change. D. may increase or decrease.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
53. As the level of activity increases, the total variable costs for the period A. increase. B. decrease. C. do not change. D. may increase or decrease.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
54. As the level of activity increases, the total fixed costs for the period A. increase. B. decrease. C. may increase or decrease. D. do not change.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Easy Topic: Cost Behavior and the Budget
55. Costs that reflect what costs should be for the units of product manufactured during the period under normal efficient operating conditions are known as A. variable costs. B. fixed costs. C. standard costs. D. semi-variable costs.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-05 Develop standard costs per unit of product. Level: Easy Topic: Standard Costs as a Control Tool
56. In a factory, the fixed costs per unit are $45 when 400 units are produced. If 450 units are produced, the fixed costs per unit would be A. $45.00. B. $40.00. C. $10.00. D. $50.63. (45 x 400)/450.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Medium Topic: Cost Behavior and the Budget
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57. In a factory, the fixed costs are $6,000 when 600 units are produced. If 900 units are produced, the fixed costs per unit would be A. $10.00. B. $9.00. C. $7.50. D. $6.67. 6,000/900.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Medium Topic: Cost Behavior and the Budget
58. In a factory, the total variable costs are $600 if 500 units are produced. If 400 units are produced, the total variable costs would be A. $480. B. $600. C. $120. D. $333. (600/500) x 400.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Medium Topic: Cost Behavior and the Budget
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59. In a factory, the total variable costs are $600 if 500 units are produced. If 800 units are produced, the variable cost per unit would be A. $1.20 B. $1.11 C. $1.00 D. $0.75 600/500.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Medium Topic: Cost Behavior and the Budget
60. The standard quantity of materials for a product was 40 pounds per unit at the standard price of $2.00 per pound. The actual price per pound of materials was $1.50, and the actual quantity used was 44 pounds. An analysis would indicate A. a $20.00 favorable price variance. B. a $22.00 favorable price variance. C. a $6.00 unfavorable quantity variance. D. a $18.00 favorable price variance. (1.50 - 2.00) x 44 = 22.00 favorable.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Medium Topic: Standard Costs as a Control Tool
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
61. The standard quantity of materials for a product was 40 pounds per unit at the standard price of $2.00 per pound. The actual price per pound of materials was $1.50, and the actual quantity used was 44 pounds. An analysis would indicate A. a $20.00 favorable price variance. B. a $8.00 favorable quantity variance. C. a $6.00 unfavorable quantity variance. D. a $8.00 unfavorable quantity variance. (44 - 40) x 2.00 = 8 unfavorable.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Medium Topic: Standard Costs as a Control Tool
62. Efficiency and cost control can be evaluated by comparing actual overhead costs with the budget for the actual level of operations with the A. flexible budget. B. fixed budget. C. budget performance report. D. manufacturing cost budget.
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 29-04 Develop a flexible budget for manufacturing costs. Level: Easy Topic: Cost Behavior and the Budget
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
63. One element that is NOT part of the standard cost is A. shipping. B. labor. C. materials. D. machine maintenance.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-05 Develop standard costs per unit of product. Level: Easy Topic: Standard Costs as a Control Tool
64. Standard quantity is usually determined by the A. purchasing department. B. engineers. C. company accountant. D. shop foreman.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-05 Develop standard costs per unit of product. Level: Easy Topic: Standard Costs as a Control Tool
65. The difference between the total standard cost and the total actual cost is the A. standard cost card amount. B. labor rate variance. C. materials price variance. D. cost variance.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-06 Compute the standard costs of products manufactured during the period and determine cost variances between actual costs and standard costs. Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Easy Topic: Standard Costs as a Control Tool
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
66. The flexible budget usually shows A. only fixed costs. B. only variable costs. C. fixed and variable costs together. D. fixed and variable costs separately.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 29-04 Develop a flexible budget for manufacturing costs. Level: Easy Topic: Cost Behavior and the Budget
The Costmore Company uses standard costing and has established the following standards for direct materials and direct labor for each unit it makes:
During July, the company made 4,000 units of product and used 13,000 gallons. The actual price paid for materials was $5.20 per gallon. Direct Labor used was 3,600 hours and workers were paid $11.75 per hour.
67. An analysis would indicate A. a $5,000 unfavorable materials quantity variance B. a $7,600 favorable materials quantity variance. C. a $2,600 favorable materials quantity variance. D. a $7,600 unfavorable materials quantity variance. (actual quantity - standard quantity) x standard price = (13,000 - (4,000 x 3)) x 5 = 5,000 unfavorable.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Medium Topic: Standard Costs as a Control Tool
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
68. An analysis would indicate A. a $900 unfavorable labor rate variance. B. a $900 favorable labor rate variance. C. a $4,800 unfavorable labor rate variance. D. a $4,80 favorable labor rate variance. (actual rate - standard rate) x actual hours= (11.75 - 12) x 3,600 = 900 favorable.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Medium Topic: Standard Costs as a Control Tool
69. An analysis would indicate A. a $900 unfavorable labor efficiency variance. B. a $900 favorable labor efficiency variance. C. a $4,800 unfavorable labor efficiency variance. D. a $4,800 favorable labor efficiency variance. (actual hours - standard hours) x standard rate = (3,600 - 4,000) x 12 = 4,800 favorable.
AACSB: Analytic AICPA FN: Measurement Bloom's: Apply Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Medium Topic: Standard Costs as a Control Tool
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
Short Answer Questions
70. Vista Company's records show the following information for the first six months of 2013.
1. What are the variable costs per hour using the high-low point method? 2. What are the fixed costs per month using the high-low point method? 1. $0.50; 2. $700
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-02 Use the high-low point method to determine the fixed and variable components of a semivariable cost. Level: Medium Topic: Cost Behavior and the Budget
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
71. The company's accountant developed the data given below for Product X for the year 2013. Use this information to compute the answers to the questions that follow.
1. What is the standard cost per unit of product for materials? 2. What is the standard cost per unit of product for labor? 3. What is the standard cost per unit of product for overhead? 4. What is the total standard cost per unit of product? 1. $6; 2. $30; 3. $7; 4. $43
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-05 Develop standard costs per unit of product. Level: Medium Topic: Standard Costs as a Control Tool
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
72. The standard costs for a unit of product are shown below.
During July, Job N-5 for 200 units was completed. The actual costs of the job are shown below.
1. What is the total cost variance between actual cost and standard cost? 2. What is the total material variance? 3. What is the material quantity variance? 4. What is the material price variance? 1. $102.32 favorable; 2. $8.40 favorable; 3. $12.00 unfavorable; 4. $20.40 favorable Feedback: 1. (591.60 + 1441.30 + 864.78) - ((3 + 7.5 + 4.5) x 200). 2. 591.60 - (3 x 200). 3. (408 - (2 x 200)) x 1.50. 4. (1.45 - 1.50) x 408.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-06 Compute the standard costs of products manufactured during the period and determine cost variances between actual costs and standard costs. Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Medium Topic: Standard Costs as a Control Tool
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
73. The standard costs for a unit of product are shown below.
During June, Job N-5 for 100 units was completed. The actual costs of the job are shown below.
1. What is the total cost variance between actual cost and standard cost? 2. What is the total material variance? 3. What is the material quantity variance? 4. What is the material price variance? 1. $1675.00 unfavorable; 2. $235 unfavorable; 3. $100 unfavorable; 4. $135.00 unfavorable Feedback: 1. (435 + 1900 + 1140) - ((2 + 10 + 6) x 100). 2. 435 - (2 x 100). 3. (300 - (2 x 100)) x 1. 4. (1.45 - 1.00) x 300.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-06 Compute the standard costs of products manufactured during the period and determine cost variances between actual costs and standard costs. Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Medium Topic: Standard Costs as a Control Tool
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
Kenwood Company's manufacturing overhead costs for the assembly department are given below.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
74. Using the information provided, prepare a flexible budget for the department for the month of May 2013, assuming that the expected production is for 2,000 direct labor hours. The flexible budget should show costs for production levels of 90 percent and 110 percent of the expected production level of 2,000 hours.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-04 Develop a flexible budget for manufacturing costs. Level: Medium Topic: Cost Behavior and the Budget
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
75. Using the information provided prepare a departmental monthly overhead performance report comparing actual costs with the budget allowance for the number of hours worked. Assume that during the month of May actual production was 1,900 hours. Actual costs for the month were as follows:
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-04 Develop a flexible budget for manufacturing costs. Level: Medium Topic: Cost Behavior and the Budget
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
76. Determine the cost behavior for each of the following items as Fixed (F), Variable (V), or Semi-variable (S).
(1) F, (2) V, (3) V, (4) V, (5) F, (6) S, (7) F, (8) F, (9) S, (10) S
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 29-01 Explain how fixed; variable; and semivariable costs change as the level of manufacturing activity changes. Level: Medium Topic: Cost Behavior and the Budget
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
77. The three classifications for manufacturing costs are fixed, variable, and semivariable. Explain what each is and how they relate to production. Fixed costs are those costs that do not change in total as production increases, but the cost per unit decreases at the same rate that the production increases. Variable costs are those costs that stay the same per unit, but vary in total in direct proportion to total production. Semivariable or mixed costs have components that are variable and components that are fixed. These costs have to be separated into their fixed and variable components in order for budgets to be prepared.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Bloom's: Apply Learning Objective: 29-02 Use the high-low point method to determine the fixed and variable components of a semivariable cost. Learning Objective: 29-03 Prepare a fixed budget for manufacturing costs. Level: Medium Topic: Cost Behavior and the Budget Topic: Standard Costs as a Control Tool
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
78. Prepare a budget for manufacturing costs for Nacelle Manufacturing for the month of July 2013 from the following information. Direct materials are estimated to be $480,000 for the year and direct labor is estimated to be $96,000. The direct labor per hour average is $13 and the budgeted level of activity for the month is 1,200 hours.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-03 Prepare a fixed budget for manufacturing costs. Level: Medium Topic: Cost Behavior and the Budget
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
79. Prepare a budget for manufacturing costs for Anasta Manufacturing for the month of April 2013 from the following information. Direct materials are estimated to be $600,000 for the year and direct labor is estimated to be $108,000. The direct labor per hour average is $16 and the budgeted level of direct labor activity for the month is 1,100 hours.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-03 Prepare a fixed budget for manufacturing costs. Level: Medium Topic: Standard Costs as a Control Tool
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
80. Complete the flexible budget of manufacturing costs for Lansome Industries for September 2013. Overhead is based on direct labor hours.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-03 Prepare a fixed budget for manufacturing costs. Learning Objective: 29-04 Develop a flexible budget for manufacturing costs. Level: Medium Topic: Cost Behavior and the Budget
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
81. Complete the flexible budget for Cullville Industries for April 2013. Overhead is based on direct labor hours.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-03 Prepare a fixed budget for manufacturing costs. Learning Objective: 29-04 Develop a flexible budget for manufacturing costs. Level: Medium Topic: Cost Behavior and the Budget
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
82. Complete the Budget Performance Report for Soville Manufacturing using the information given. Comment on the results.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-03 Prepare a fixed budget for manufacturing costs. Level: Medium Topic: Cost Behavior and the Budget
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
83. Complete the Budget Performance Report for Soville Manufacturing. Create a flexible budget by adding a budget column at the actual number of labor hours. Compare the actual to the flexible budget numbers you calculated.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-04 Develop a flexible budget for manufacturing costs. Level: Medium Topic: Cost Behavior and the Budget
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
84. Develop the standard costs from the information given. Morlee Corporation makes three models of storage sheds. Model JB102 a 10' by 12' model that looks Victorian with windows, shutters and gingerbread along the roof line, is Morlee's most popular model. Direct materials for the JB102 consists of $66.00 for 7 sheets of pressed board, $59.00 for 2 x 4's for framing, $22.00 for roofing shingles, and $17.00 for aluminum siding. The nails, glue and other indirect materials for the company total $38,880 per year and are applied based on direct labor hours. The total direct labor hours for Morlee for one year are estimated to be 8,000 per year. Direct labor for each JB 102 is estimated to be 7 hours. The average hourly rate at Morelee is $14.50. Prepare a standard cost card for Model JB102. Units and per unit amount for material can be omitted.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-05 Develop standard costs per unit of product. Level: Medium Topic: Standard Costs as a Control Tool
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
85. The Hoatzin Birdhouse Factory produced the following standard cost card. In July, the company had an order for 500 birdhouses (Model: Wren) for Job No. CB32. Manufacturing overhead is based on direct labor hours. The manufacturing overhead cost estimates for the year total $32,400 and total direct labor hours are estimated at 9,000 for the year. Complete the Standard Cost Card and Job Order Cost Sheet. Calculate the total cost variance.
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Manufacturing overhead is $3.60 per hour or 1.20 per birdhouse. Total standard cost per birdhouse is $13.60. Manufacturing overhead applied to Job Order No. CB32 was $595.80 and total actual costs for the job was $6,541.80.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-06 Compute the standard costs of products manufactured during the period and determine cost variances between actual costs and standard costs. Level: Medium Topic: Standard Costs as a Control Tool
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
Canine Cottage Industries makes several specially designed doghouses. The Standard Cost Card for The Gables model is shown. A customer ordered three of this model for their Labrador retrievers. The Job Cost Sheet is shown.
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
86. From the information given for Canine Cottage Industries, compute the materials, quantity and price variances.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Medium Topic: Standard Costs as a Control Tool
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
87. From the information given for Canine Cottage Industries, compute the labor total, time and rate variances.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 29-07 Compute the amounts and analyze the nature of variances from standard for raw materials; labor; and manufacturing overhead. Level: Medium Topic: Standard Costs as a Control Tool
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Chapter 29 - Controlling Manufacturing Costs: Standard Costs
Matching Questions
88. Match the following descriptions with the appropriate term.
1. An operating plan expressed in monetary units 2. Used to determine the fixed and variable components of a semivariable cost 3. A budget representing only one level of activity 4. A comparison of actual costs and budgeted costs 5. Costs that vary with, bust not in direct proportion to, the volume of activity 6. A budget made for each manufacturing cost 7. Costs that do not change in total as the level of activity changes 8. The different levels of activity at which a factory is expected to operate 9. Costs that vary in total in direct proportion to changes in the level of activity 10. A budget that shows the budgeted costs at various levels of activity AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 29-08 Define the accounting terms new to this chapter. Level: Easy Topic: Standard Costs as a Control Tool
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Budget performance report 4 Fixed budget 3 Budget 1 Flexible budget 10 Manufacturing cost budget 6 Semi-variable costs 5 Fixed costs 7 High-low point method 2 Relevant range of activity 8 Variable costs 9
Chapter 29 - Controlling Manufacturing Costs: Standard Costs
89. Match the following descriptions with the appropriate term.
1. Labor time variance 2. The difference between the actual price and the standard cost for materials multiplied by the actual quantity of materials used 3. The difference between the actual hours worked and the standard labor hours allowed for the job multiplied by the standard cost per hour 4. The difference between the actual labor rate per hour and the standard labor rate per hour multiplied by the actual number of hours worked on the job 5. Materials quantity variance 6. Shows the per unit standard costs for materials, labor, and overhead 7. The difference between the actual quantity used and the quantity of materials allowed multiplied by the standard cost of the materials 8. The difference between actual and standard overhead costs 9. The difference between the total standard cost and the total actual cost 10. Explains the difference between standard cost and actual cost AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 29-08 Define the accounting terms new to this chapter. Level: Easy Topic: Standard Costs as a Control Tool
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Materials usage variance 5
Cost variance 9 Labor efficiency variance 1 Materials price variance 2 Labor time variance 3 Standard cost card 6 Variance analysis 10 Overhead variance 8 Labor rate variance 4 Materials quantity variance 7
Chapter 30 - Cost-Revenue Analysis for Decision Making
Chapter 30 Cost-Revenue Analysis for Decision Making True / False Questions
1. Opportunity costs are earnings or potential benefits foregone because a certain course of action is taken. True False
2. A cost that does not change regardless of the option selected need not be considered in the decision-making process. True False
3. Common costs are allocated to each segment of a business to determine the segment's contribution margin. True False
4. Income statements prepared on an absorption-costing basis normally are more useful for internal decision making than income statements prepared on a direct costing basis. True False
5. If a segment of a business is expected to produce an annual contribution margin of $30,000 but is also expected to incur controllable fixed costs of about $40,000 annually, that segment should probably be discontinued. True False
6. A segment of a business shows a contribution margin of $30,000 but incurs controllable fixed costs of $26,000. Eliminating that segment will result in an increase in company-wide net income. True False
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7. The first step in the decision-making process is to determine relevant cost and revenue data. True False
8. Under direct costing, all fixed manufacturing overhead is charged off as a current expense. True False
9. The direct costing procedure is not used for financial reporting. True False
10. Under absorption costing, a portion of the fixed manufacturing overhead is deferred to future periods as part of the inventory value. True False
11. It is appropriate to consider nonfinancial factors in the decision-making process. True False
12. The direct costing procedure is sometimes referred to as variable costing. True False
13. If the finished goods inventory increases during the period, the reported net income will be larger under direct costing than under absorption costing. True False
14. In managerial decisions, nonmanufacturing costs can be ignored. True False
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Chapter 30 - Cost-Revenue Analysis for Decision Making
15. Segment managers can never control fixed costs. True False
16. Under the contribution margin approach, common costs are deducted from the total of all segment contributions to determine the company's profit. True False
17. If a decision must be made to replace a machine, the book value of the existing machine is a sunk cost. True False
18. Direct costing is extremely useful in setting prices of products in special-order situations. True False
19. In deciding whether to manufacture or to purchase a product, fixed costs are generally ignored. True False
20. Before deciding whether to purchase new equipment, a firm should consider employee morale and the quality of the new equipment's output. True False
Fill in the Blank Questions
21. Costs that are not directly traceable to any specific department are called ____________________ costs. ________________________________________
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Chapter 30 - Cost-Revenue Analysis for Decision Making
22. A cost that has already been incurred and is irrelevant for decision-making purposes is called a(n) ____________________ cost. ________________________________________
23. The difference in cost between one alternative and another is called a(n) ____________________ cost. ________________________________________
24. Earnings or potential benefits foregone because a certain course of action is taken are called ____________________ costs. ________________________________________
25. Income statements prepared on a(n) ____________________ costing basis usually provide data in a form more useful for internal decision making. ________________________________________
26. The difference between revenue and variable costs is referred to as the __________________. ________________________________________
27. A segment of a business probably should be discontinued if it cannot produce a(n) __________________. ________________________________________
28. If a decision must be made about whether to replace a machine, the ____________________ value of the existing machine is irrelevant. ________________________________________
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Chapter 30 - Cost-Revenue Analysis for Decision Making
29. The increase in a cost from one alternative to another is called a(n) ____________________ cost. ________________________________________
30. Under ____________________ costing procedures, fixed manufacturing costs are included in the cost of goods manufactured. ________________________________________
31. The excess of net sales over the cost of goods sold, based on variable costs only, is referred to as the __________________. ________________________________________
32. The inventory costing system not acceptable for financial reporting is ____________________ costing. ________________________________________
33. The variable operating expenses are deducted from the manufacturing margin to arrive at the ____________________ on sales. ________________________________________
34. Under ____________________ costing, a portion of fixed manufacturing overhead is deferred to future periods as part of the inventory value. ________________________________________
35. In deciding whether to manufacture or to purchase a product, ____________________ costs are generally ignored. ________________________________________
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Chapter 30 - Cost-Revenue Analysis for Decision Making
Multiple Choice Questions
36. Which of the following is NOT a step in the decision-making process? A. Explore workable alternatives B. Determine relevant cost and revenue data C. Consider appropriate nonfinancial factors D. Make a decision
37. Which of the following is the first step in the decision-making process? A. Evaluate the cost and revenue data B. Identify workable alternatives C. Define the problem D. Consider appropriate nonfinancial factors
38. Which is the final step in the decision-making process? A. Consider appropriate nonfinancial factors B. Make a decision C. Identify workable alternatives D. Evaluate the cost and revenue data
39. Which of the following is NOT a consideration regarding a special order? A. If the company has sufficient capacity B. If the special order jeopardized sales to existing customers C. Federal laws regarding the price D. Whether employee morale would be affected
40. Which of the following is NOT a consideration regarding the purchase of new equipment when looking at the net income under each alternative? A. depreciation expense per year on the new equipment B. annual sales C. differential labor costs D. additional fixed costs under an alternative
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Chapter 30 - Cost-Revenue Analysis for Decision Making
41. Which of the following is NOT a consideration when determining whether to continue making a part or to buy that part? A. the timing of the cash receipts and expenditures B. the opportunity cost C. the impact on employees D. the sunk cost
42. Contribution margin is calculated by A. deducting variable costs from revenue. B. deducting variable costs and controllable fixed costs from revenue. C. deducting variable costs and common costs from revenue. D. deducting fixed costs from revenue.
43. Which of the following is not relevant in decision making? A. opportunity costs B. differential costs C. sunk costs D. variable costs
44. Which of the following cost amounts can be found in a firm's accounting records? A. opportunity costs B. differential costs C. incremental costs D. sunk costs
45. A segment of a business probably should be discontinued if A. its common costs exceed its contribution margin. B. its contribution margin exceeds its controllable fixed costs and its common costs. C. it cannot produce a contribution margin. D. it has a net loss.
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Chapter 30 - Cost-Revenue Analysis for Decision Making
46. Costs that are not directly traceable to a segment of a business are called A. sunk costs. B. common costs. C. fixed costs. D. incremental costs.
47. When direct costing is used, cost of goods sold reflects A. both variable and fixed manufacturing costs. B. variable manufacturing costs and variable selling and administrative expenses. C. variable manufacturing costs only. D. fixed manufacturing costs only.
48. On an income statement prepared with a direct costing approach, the excess of sales over the cost of goods sold, based on variable costs only, is referred to as A. the marginal gross profit on sales. B. the manufacturing margin. C. the marginal income on sales. D. the contribution margin.
49. Fixed manufacturing costs are written off as current expenses of the period in which they occurred when using A. direct costing. B. standard costing. C. absorption costing. D. differential costing.
50. Which inventory costing system is not acceptable for financial reporting purposes? A. absorption costing B. direct costing C. standard costing D. variable costing
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Chapter 30 - Cost-Revenue Analysis for Decision Making
51. Which of the following would not be relevant to a decision about whether to continue making a part or whether to buy it from an outside supplier? A. alternative uses for the plant where the part was produced if the part is purchased B. a fee previously spent for design of the part C. the variable costs of making the part D. the number of additional employees needed to make the part
52. In making a decision to replace a machine, which of the following is not relevant? A. the training that workers will need in order to use the new machine B. the variable costs of operating the new machine C. the variable costs of operating the old machine D. the book value of the old machine
53. Which of the following is not true of the direct costing procedure? A. Variable and fixed costs are considered as part of the cost of goods manufactured. B. The cost of goods sold, based solely on variable costs, is subtracted from net sales to arrive at the manufacturing margin. C. Variable selling expenses are deducted from the manufacturing margin. D. Variable administrative expenses are deducted from the manufacturing margin.
54. A company has sales of $100,000, ending finished goods inventory of $9,000, variable manufacturing costs of $50,000, and fixed manufacturing costs of $28,000 for the year. Assuming the company uses direct costing, the manufacturing margin for the year is A. $22,000. B. $31,000. C. $59,000. D. $13,000.
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55. A company has sales of $100,000, ending finished goods inventory of $9,000, variable manufacturing costs of $50,000, and fixed manufacturing costs of $28,000 for the year. Assuming the company uses direct costing, the cost of goods sold for the year is A. $22,000. B. $31,000. C. $59,000. D. $13,000.
56. Using the absorption method, cost of goods manufactured for the year is: A. $450,000 B. $550,000 C. $660,000 D. $900,000
57. Using the absorption method, the value of ending inventory of finished goods is: A. $100,000 B. $120,000 C. $140,000 D. $220,000
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Chapter 30 - Cost-Revenue Analysis for Decision Making
58. Using the absorption method, the cost of goods sold is: A. $550,000 B. $540,000 C. $480,000 D. $450,000
59. Using the absorption method, the gross profit on sales is: A. $550,000 B. $540,000 C. $480,000 D. $450,000
60. Using the absorption method, the net income for year is: A. $200,000 B. $180,000 C. $170,000 D. $16,000
61. Using direct costing, the value of ending inventory of finished goods is: A. $100,000 B. $120,000 C. $140,000 D. $220,000
62. Using direct costing, the manufacturing margin is: A. $550,000 B. $540,000 C. $480,000 D. $450,000
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Chapter 30 - Cost-Revenue Analysis for Decision Making
63. Using direct costing, the marginal income on sales is: A. $550,000 B. $540,000 C. $414,000 D. $200,000
64. A segment of a business reported a contribution margin of $36,000 and controllable fixed costs of $12,000. If the segment had been eliminated, the company-wide net income would have been A. $12,000 higher. B. $24,000 lower. C. $36,000 lower. D. $24,000 higher.
65. A segment of a business reported a contribution margin of $36,000 and common costs of $12,000. If the segment had been eliminated, the company-wide net income would have been A. $12,000 higher. B. $24,000 lower. C. $36,000 lower. D. $24,000 higher.
66. If a decision must be made to close a warehouse, non-refundable prepaid rent on the warehouse is A. an opportunity cost. B. a common cost. C. a sunk cost. D. a variable cost.
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67. Direct costing differs from absorption costing in that A. under direct costing all fixed overhead is expensed in the current period. B. under absorption costing all fixed manufacturing overhead is expensed in the current period. C. under direct costing a portion of the fixed manufacturing overhead is included in the finished goods inventory. D. under absorption costing an increase in finished goods inventory does not affect the amount of fixed costs expensed.
68. When the balance in ending finished goods inventory increases, net income under absorption costing A. is lower than under direct costing. B. is higher than under direct costing. C. is the same under direct costing. D. is unaffected by the increase.
69. Which of the following should NOT be a consideration when deciding whether to make or buy a part? A. differential fixed costs B. opportunity costs C. sunk costs D. capacity costs
70. Which of the following should NOT be a consideration when deciding whether to make or buy a part? A. impact on quality of the part under each set of circumstances B. impact on factory employee morale C. impact on continued supply of the part D. impact on sales to existing customers
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Short Answer Questions
71. Data for a firm's first year of operation is given below. The firm uses absorption costing.
1. What is the cost of goods manufactured for the year? 2. What is the ending inventory of finished goods? 3. What is the cost of goods sold? 4. What is the net income (loss) for the year?
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Chapter 30 - Cost-Revenue Analysis for Decision Making
72. Data for a firm's first year of operation is given below. The firm uses direct costing.
1. What is the ending inventory of finished goods? 2. What is the cost of goods sold? 3. What is the manufacturing margin for the year? 4. What is the net income (loss) for the year?
73. Assume that the Venus Company, which now sells its product for $75 per unit, has an opportunity to sell 3,000 units in a foreign country for $54 a unit. The order will not affect its current domestic sales. Shipping costs of $9 a unit would be incurred on the order. Current variable manufacturing costs are $31 per unit manufactured. Variable selling and administrative costs are $14 per unit sold. Included in variable selling expenses is a sales commission of $1 per unit, which would not apply to the special order. Fixed manufacturing costs are $75,000 per year and fixed selling and administrative expenses are $45,000 per year. The company is now manufacturing and selling 5,000 units per year. 1. Should the Venus Company take the order? 2. What impact would the special order have on profits?
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Chapter 30 - Cost-Revenue Analysis for Decision Making
74. The Sloan Corporation is considering the purchase of a new factory machine at a cost of $30,000. The machine would perform a function that is now being performed by hand. The new machine would have a life of five years and would produce 5,000 units a year (the current output). Direct labor costs would be reduced by $1.10 a unit. Variable overhead costs would be reduced by $0.35 a unit. Fixed costs, other than depreciation, would increase by $2,500 a year. 1. Should the machine be purchased? 2. What impact would the decision have on net income?
The data given below pertains to the operations of the Newton Products Corporation for the year ended December 31, 2013
75. Based on the information given prepare an income statement for the year using the absorption costing approach. Assume that the beginning finished goods inventory had a cost of $35 per unit.
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Chapter 30 - Cost-Revenue Analysis for Decision Making
76. Based on the information given prepare an income statement for the year using the direct costing approach. Assume that the beginning finished goods inventory had a cost of $25 per unit.
77. The data given below is taken from the budgeted income statement of the Arrow Corporation for 2013. It shows the projected net income or loss for each of the firm's three products. Management is concerned about the budgeted loss for Product C and wants to discontinue it. Prepare an analysis indicating the effects of discontinuing Product C. Based on the analysis, indicate the decision that should be made.
Additional information: (a.) Materials and labor are variable costs. (b.) Total manufacturing overhead is applied at 50 percent of the direct labor costs. (c.) Variable overhead is 10 percent of the direct labor costs. (d.) Fixed overhead totals $11,600 a year. (e.) Operating expenses include variable costs at 20 percent of sales dollars. (f.) Fixed operating expenses total $18,000. (g.) Fixed overhead costs and fixed operating expenses are expected to continue if Product C is eliminated.
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78. The Alvarado Equipment Corporation is currently manufacturing a part that goes into its main product. Each year 2,500 of these parts are used. Cost data for the past year that relates to the 2,500 parts is given below. Fixed costs are allocated on the basis of direct labor hours. An outside company has offered to supply the part for $45 a unit, plus a shipping charge of $2 a unit. The plant capacity now used by Alvarado to manufacture the part would not be used within the foreseeable future if the part is purchased outside.
Prepare an analysis comparing the unit cost of manufacturing the part with the unit cost of purchasing it. Based on the analysis, indicate the decision that should be made.
79. The following information relates to a one-time special order from a flood relief organization for 200 of its book bags at $8.50. Current manufacturing costs are as follows.
Fixed manufacturing overhead is based on capacity of 4,500 units per year. Normal sales are 4,000 book bags per year. Only $0.46 of the selling costs will be incurred for this special order. What are the relevant costs regarding this special order? Pose one nonfinancial consideration regarding the acceptance or rejection of this special offer.
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80. The following information relates to the purchase of new machine being considered.
The new machine would enable the company to make 13,500 units per year. The current capacity of 12,000 is based on the maximum number of units that the old machine can produce. The company has had to turn down orders in the past few years due to this limit on capacity and estimates that it can sell as many of the product as it can produce. The sales price per unit of the product is $34.50. Determine the relevant data. Pose one addition consideration regarding this decision.
81. Companies often consider buying the parts for the products they make or making the parts they buy. List the factors management should consider when looking into making a part they have been purchasing.
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82. Tyro Manufacturing has a machine that requires frequent repairs. Production is stopped and as a result some shipment dates have not been met. The manager read in their industry's trade magazine about a new machine that has just been developed. Using the given headings, list the six steps of the decision making process. Relate each of the first five to this specific situation using the format provided.
83. McAdd Industries is considering whether to continue making part MPG 411 or buying the part from a supplier. The supplier can sell the needed number of parts (47,000 projected) to McAdd for an amount that is above the company's current cost to manufacture it. If McAdd decides to purchase the parts from its supplier, it will be able to reconfigure the manufacturing floor in order to allow increased production of 50 of its product for an increased contribution margin of $17,000 for the year. The old machine has a book value of $39,000, and can be sold for $4,000. Discuss this situation. What are the considerations?
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84. Using the given information, determine the income under both the absorption and the direct (variable) costing methods for CRL Company this year. Explain the difference, if any.
85. Using the given information, determine the income under both the absorption and the direct (variable) costing methods for the company for the year. Explain the difference, if any.
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86. Analyze the following divisions of Johannes' Clothing Company. Management has to make a decision whether to close one of the divisions or keep both open. Make a recommendation to management based on the information given. Of the fixed costs, parts are controllable within the divisions, but $31,000 of the total are company headquarters fixed costs. Of these, $16,000 are allocated to the Skirt Division and $15,000 to the Shirt Division.
87. Nabob Corporation is considering expanding into the Midwest. It is estimated that this new division would generate an average of $378,000 in sales per year. The variable manufacturing costs would be $187,000, variable selling costs would be $72,000, and controllable fixed costs would be $90,000. In addition, the company planned to allocate $85,000 of company common fixed costs to the new division. Is this a wise decision for Nabob Corporation? Why?
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88. Bianca Jewel Box Manufacturing received an offer from a nonprofit organization for a one-time purchase of 2,000 of its Model RYA18261 at $20 each for distribution to flood victims in the South. Full capacity at Bianca is 25,000 units. Bianca currently expects to make 20,000 units in the current year and based all estimates on that expectation. There will be no delivery costs for this special order. The average costs to Bianca to produce one Model RYA18261 are $27 each as shown.
Should Bianca accept this special offer? Explain your decision.
89. The Lourdes Corporation manufactures fans. A newly-formed construction company in the area desires to buy up to 300 of their Model CSB3192 this year. Lourdes quoted them a price of $67 which covers all costs plus markon. The construction company has indicated that they will buy all the fans they need in the future from Lourdes Corporation if Lourdes will sell the fans for $60 each. Lourdes Corporation has the capacity to make the 300 fans above their usual production needs. Currently, Lourdes ships all of their production to companies in other parts of the country, but do not usually sell any locally. If the $60 offer covers all costs and allows a small markon, what other things should Lourdes consider before coming to a final decision?
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Matching Questions
90. Match the following descriptions with the appropriate term.
1. Sales minus the variable cost of goods sold 2. The difference in cost between one alternative and another 3. The manufacturing margin minus variable operating expenses 4. A cost that has been incurred and will not change as a result of a decision 5. Costs not directly traceable to a specific segment of a business 6. Costs that the segment manager can control 7. The accounting procedure whereby only variable costs are included in the cost of goods manufactured, and fixed manufacturing costs are written off as expenses in the period in which they are incurred 8. Revenues minus variable costs 9. The accounting procedure whereby all manufacturing costs, including fixed costs, are included in the cost of goods manufactured 10. Potential earnings or benefits that are given up because a certain course of action is taken
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Controllable fixed costs ____ Manufacturing margin ____ Sunk cost ____ Absorption costing ____ Opportunity cost ____ Differential cost ____
Marginal income ____ Common costs ____
Direct costing ____ Contribution margin ____
Chapter 30 - Cost-Revenue Analysis for Decision Making
Chapter 30 Cost-Revenue Analysis for Decision Making Answer Key
True / False Questions
1. Opportunity costs are earnings or potential benefits foregone because a certain course of action is taken. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Level: Easy Topic: The Decision Process
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Chapter 30 - Cost-Revenue Analysis for Decision Making
2. A cost that does not change regardless of the option selected need not be considered in the decision-making process. TRUE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Level: Easy Topic: The Decision Process
3. Common costs are allocated to each segment of a business to determine the segment's contribution margin. FALSE
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Level: Easy Topic: The Decision Process
4. Income statements prepared on an absorption-costing basis normally are more useful for internal decision making than income statements prepared on a direct costing basis. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Easy Topic: The Decision Process
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Chapter 30 - Cost-Revenue Analysis for Decision Making
5. If a segment of a business is expected to produce an annual contribution margin of $30,000 but is also expected to incur controllable fixed costs of about $40,000 annually, that segment should probably be discontinued. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Level: Medium Topic: The Decision Process
6. A segment of a business shows a contribution margin of $30,000 but incurs controllable fixed costs of $26,000. Eliminating that segment will result in an increase in company-wide net income. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Apply Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Level: Medium Topic: The Decision Process
7. The first step in the decision-making process is to determine relevant cost and revenue data. FALSE
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 30-01 Explain the basic steps in the decision-making process. Level: Easy Topic: The Decision Process
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Chapter 30 - Cost-Revenue Analysis for Decision Making
8. Under direct costing, all fixed manufacturing overhead is charged off as a current expense. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Easy Topic: The Decision Process
9. The direct costing procedure is not used for financial reporting. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Easy Topic: The Decision Process
10. Under absorption costing, a portion of the fixed manufacturing overhead is deferred to future periods as part of the inventory value. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Easy Topic: The Decision Process
11. It is appropriate to consider nonfinancial factors in the decision-making process. TRUE
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 30-01 Explain the basic steps in the decision-making process. Level: Easy Topic: The Decision Process
30-28
Chapter 30 - Cost-Revenue Analysis for Decision Making
12. The direct costing procedure is sometimes referred to as variable costing. TRUE
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Easy Topic: The Decision Process
13. If the finished goods inventory increases during the period, the reported net income will be larger under direct costing than under absorption costing. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Easy Topic: The Decision Process
14. In managerial decisions, nonmanufacturing costs can be ignored. FALSE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Level: Easy Topic: The Decision Process
15. Segment managers can never control fixed costs. FALSE
AACSB: Analytic AICPA BB: Resource Management Bloom's: Remember Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Level: Easy Topic: The Decision Process
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Chapter 30 - Cost-Revenue Analysis for Decision Making
16. Under the contribution margin approach, common costs are deducted from the total of all segment contributions to determine the company's profit. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Level: Easy Topic: The Decision Process
17. If a decision must be made to replace a machine, the book value of the existing machine is a sunk cost. TRUE
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Level: Easy Topic: The Decision Process
18. Direct costing is extremely useful in setting prices of products in special-order situations. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 30-05a Pricing products in special cases. Level: Easy Topic: Cost-Revenue Analysis
19. In deciding whether to manufacture or to purchase a product, fixed costs are generally ignored. TRUE
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 30-05c Deciding whether to make or to buy a part. Level: Easy Topic: Cost-Revenue Analysis
30-30
Chapter 30 - Cost-Revenue Analysis for Decision Making
20. Before deciding whether to purchase new equipment, a firm should consider employee morale and the quality of the new equipment's output. TRUE
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 30-05b Deciding whether to purchase new equipment. Level: Easy Topic: Cost-Revenue Analysis
Fill in the Blank Questions
21. Costs that are not directly traceable to any specific department are called ____________________ costs. common
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Level: Easy Topic: The Decision Process
22. A cost that has already been incurred and is irrelevant for decision-making purposes is called a(n) ____________________ cost. sunk
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Learning Objective: 30-06 Define the accounting terms new to this chapter. Level: Easy Topic: Cost-Revenue Analysis Topic: The Decision Process
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Chapter 30 - Cost-Revenue Analysis for Decision Making
23. The difference in cost between one alternative and another is called a(n) ____________________ cost. differential
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Learning Objective: 30-06 Define the accounting terms new to this chapter. Level: Easy Topic: Cost-Revenue Analysis Topic: The Decision Process
24. Earnings or potential benefits foregone because a certain course of action is taken are called ____________________ costs. opportunity
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Learning Objective: 30-06 Define the accounting terms new to this chapter. Level: Easy Topic: Cost-Revenue Analysis Topic: The Decision Process
25. Income statements prepared on a(n) ____________________ costing basis usually provide data in a form more useful for internal decision making. direct
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Learning Objective: 30-06 Define the accounting terms new to this chapter. Level: Easy Topic: Cost-Revenue Analysis Topic: The Decision Process
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Chapter 30 - Cost-Revenue Analysis for Decision Making
26. The difference between revenue and variable costs is referred to as the __________________. contribution margin
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Level: Easy Topic: The Decision Process
27. A segment of a business probably should be discontinued if it cannot produce a(n) __________________. contribution margin
AACSB: Analytic AICPA FN: Measurement Bloom's: Understand Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Level: Easy Topic: The Decision Process
28. If a decision must be made about whether to replace a machine, the ____________________ value of the existing machine is irrelevant. book
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Level: Easy Topic: The Decision Process
29. The increase in a cost from one alternative to another is called a(n) ____________________ cost. incremental
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Level: Easy Topic: The Decision Process
30-33
Chapter 30 - Cost-Revenue Analysis for Decision Making
30. Under ____________________ costing procedures, fixed manufacturing costs are included in the cost of goods manufactured. absorption
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Learning Objective: 30-06 Define the accounting terms new to this chapter. Level: Easy Topic: Cost-Revenue Analysis Topic: The Decision Process
31. The excess of net sales over the cost of goods sold, based on variable costs only, is referred to as the __________________. manufacturing margin
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Learning Objective: 30-06 Define the accounting terms new to this chapter. Level: Easy Topic: Cost-Revenue Analysis Topic: The Decision Process
32. The inventory costing system not acceptable for financial reporting is ____________________ costing. direct
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Easy Topic: The Decision Process
30-34
Chapter 30 - Cost-Revenue Analysis for Decision Making
33. The variable operating expenses are deducted from the manufacturing margin to arrive at the ____________________ on sales. marginal income
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Learning Objective: 30-06 Define the accounting terms new to this chapter. Level: Easy Topic: Cost-Revenue Analysis Topic: The Decision Process
34. Under ____________________ costing, a portion of fixed manufacturing overhead is deferred to future periods as part of the inventory value. absorption
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Easy Topic: The Decision Process
35. In deciding whether to manufacture or to purchase a product, ____________________ costs are generally ignored. fixed
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 30-05c Deciding whether to make or to buy a part. Level: Easy Topic: Cost-Revenue Analysis
30-35
Chapter 30 - Cost-Revenue Analysis for Decision Making
Multiple Choice Questions
36. Which of the following is NOT a step in the decision-making process? A. Explore workable alternatives B. Determine relevant cost and revenue data C. Consider appropriate nonfinancial factors D. Make a decision
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 30-01 Explain the basic steps in the decision-making process. Level: Medium Topic: The Decision Process
37. Which of the following is the first step in the decision-making process? A. Evaluate the cost and revenue data B. Identify workable alternatives C. Define the problem D. Consider appropriate nonfinancial factors
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 30-01 Explain the basic steps in the decision-making process. Level: Medium Topic: The Decision Process
38. Which is the final step in the decision-making process? A. Consider appropriate nonfinancial factors B. Make a decision C. Identify workable alternatives D. Evaluate the cost and revenue data
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 30-01 Explain the basic steps in the decision-making process. Level: Medium Topic: The Decision Process
30-36
Chapter 30 - Cost-Revenue Analysis for Decision Making
39. Which of the following is NOT a consideration regarding a special order? A. If the company has sufficient capacity B. If the special order jeopardized sales to existing customers C. Federal laws regarding the price D. Whether employee morale would be affected
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 30-05c Deciding whether to make or to buy a part. Level: Medium Topic: Cost-Revenue Analysis
40. Which of the following is NOT a consideration regarding the purchase of new equipment when looking at the net income under each alternative? A. depreciation expense per year on the new equipment B. annual sales C. differential labor costs D. additional fixed costs under an alternative
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 30-05b Deciding whether to purchase new equipment. Level: Medium Topic: Cost-Revenue Analysis
41. Which of the following is NOT a consideration when determining whether to continue making a part or to buy that part? A. the timing of the cash receipts and expenditures B. the opportunity cost C. the impact on employees D. the sunk cost
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 30-05c Deciding whether to make or to buy a part. Level: Medium Topic: Cost-Revenue Analysis
30-37
Chapter 30 - Cost-Revenue Analysis for Decision Making
42. Contribution margin is calculated by A. deducting variable costs from revenue. B. deducting variable costs and controllable fixed costs from revenue. C. deducting variable costs and common costs from revenue. D. deducting fixed costs from revenue.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Analyze Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Level: Medium Topic: The Decision Process
43. Which of the following is not relevant in decision making? A. opportunity costs B. differential costs C. sunk costs D. variable costs
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Level: Easy Topic: The Decision Process
44. Which of the following cost amounts can be found in a firm's accounting records? A. opportunity costs B. differential costs C. incremental costs D. sunk costs
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Level: Easy Topic: The Decision Process
30-38
Chapter 30 - Cost-Revenue Analysis for Decision Making
45. A segment of a business probably should be discontinued if A. its common costs exceed its contribution margin. B. its contribution margin exceeds its controllable fixed costs and its common costs. C. it cannot produce a contribution margin. D. it has a net loss.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Level: Easy Topic: The Decision Process
46. Costs that are not directly traceable to a segment of a business are called A. sunk costs. B. common costs. C. fixed costs. D. incremental costs.
AACSB: Analytic AICPA FN: Measurement Bloom's: Remember Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Level: Easy Topic: The Decision Process
47. When direct costing is used, cost of goods sold reflects A. both variable and fixed manufacturing costs. B. variable manufacturing costs and variable selling and administrative expenses. C. variable manufacturing costs only. D. fixed manufacturing costs only.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Easy Topic: The Decision Process
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48. On an income statement prepared with a direct costing approach, the excess of sales over the cost of goods sold, based on variable costs only, is referred to as A. the marginal gross profit on sales. B. the manufacturing margin. C. the marginal income on sales. D. the contribution margin.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Easy Topic: The Decision Process
49. Fixed manufacturing costs are written off as current expenses of the period in which they occurred when using A. direct costing. B. standard costing. C. absorption costing. D. differential costing.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Easy Topic: The Decision Process
50. Which inventory costing system is not acceptable for financial reporting purposes? A. absorption costing B. direct costing C. standard costing D. variable costing
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Easy Topic: The Decision Process
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51. Which of the following would not be relevant to a decision about whether to continue making a part or whether to buy it from an outside supplier? A. alternative uses for the plant where the part was produced if the part is purchased B. a fee previously spent for design of the part C. the variable costs of making the part D. the number of additional employees needed to make the part
AACSB: Analytic AICPA FN: Decision Making Bloom's: Remember Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Level: Easy Topic: The Decision Process
52. In making a decision to replace a machine, which of the following is not relevant? A. the training that workers will need in order to use the new machine B. the variable costs of operating the new machine C. the variable costs of operating the old machine D. the book value of the old machine
AACSB: Analytic AICPA FN: Decision Making Bloom's: Apply Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Level: Easy Topic: The Decision Process
53. Which of the following is not true of the direct costing procedure? A. Variable and fixed costs are considered as part of the cost of goods manufactured. B. The cost of goods sold, based solely on variable costs, is subtracted from net sales to arrive at the manufacturing margin. C. Variable selling expenses are deducted from the manufacturing margin. D. Variable administrative expenses are deducted from the manufacturing margin.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Easy Topic: The Decision Process
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54. A company has sales of $100,000, ending finished goods inventory of $9,000, variable manufacturing costs of $50,000, and fixed manufacturing costs of $28,000 for the year. Assuming the company uses direct costing, the manufacturing margin for the year is A. $22,000. B. $31,000. C. $59,000. D. $13,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Medium Topic: The Decision Process
55. A company has sales of $100,000, ending finished goods inventory of $9,000, variable manufacturing costs of $50,000, and fixed manufacturing costs of $28,000 for the year. Assuming the company uses direct costing, the cost of goods sold for the year is A. $22,000. B. $31,000. C. $59,000. D. $13,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Medium Topic: The Decision Process
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56. Using the absorption method, cost of goods manufactured for the year is: A. $450,000 B. $550,000 C. $660,000 D. $900,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-01 Explain the basic steps in the decision-making process. Level: Medium Topic: The Decision Process
57. Using the absorption method, the value of ending inventory of finished goods is: A. $100,000 B. $120,000 C. $140,000 D. $220,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-01 Explain the basic steps in the decision-making process. Level: Medium Topic: The Decision Process
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58. Using the absorption method, the cost of goods sold is: A. $550,000 B. $540,000 C. $480,000 D. $450,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-01 Explain the basic steps in the decision-making process. Level: Medium Topic: The Decision Process
59. Using the absorption method, the gross profit on sales is: A. $550,000 B. $540,000 C. $480,000 D. $450,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-01 Explain the basic steps in the decision-making process. Level: Medium Topic: The Decision Process
60. Using the absorption method, the net income for year is: A. $200,000 B. $180,000 C. $170,000 D. $16,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-01 Explain the basic steps in the decision-making process. Level: Medium Topic: The Decision Process
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61. Using direct costing, the value of ending inventory of finished goods is: A. $100,000 B. $120,000 C. $140,000 D. $220,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Medium Topic: The Decision Process
62. Using direct costing, the manufacturing margin is: A. $550,000 B. $540,000 C. $480,000 D. $450,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-01 Explain the basic steps in the decision-making process. Level: Medium Topic: The Decision Process
63. Using direct costing, the marginal income on sales is: A. $550,000 B. $540,000 C. $414,000 D. $200,000
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-01 Explain the basic steps in the decision-making process. Level: Medium Topic: The Decision Process
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64. A segment of a business reported a contribution margin of $36,000 and controllable fixed costs of $12,000. If the segment had been eliminated, the company-wide net income would have been A. $12,000 higher. B. $24,000 lower. C. $36,000 lower. D. $24,000 higher.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Level: Medium Topic: The Decision Process
65. A segment of a business reported a contribution margin of $36,000 and common costs of $12,000. If the segment had been eliminated, the company-wide net income would have been A. $12,000 higher. B. $24,000 lower. C. $36,000 lower. D. $24,000 higher.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Level: Medium Topic: The Decision Process
66. If a decision must be made to close a warehouse, non-refundable prepaid rent on the warehouse is A. an opportunity cost. B. a common cost. C. a sunk cost. D. a variable cost.
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Level: Easy Topic: The Decision Process
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67. Direct costing differs from absorption costing in that A. under direct costing all fixed overhead is expensed in the current period. B. under absorption costing all fixed manufacturing overhead is expensed in the current period. C. under direct costing a portion of the fixed manufacturing overhead is included in the finished goods inventory. D. under absorption costing an increase in finished goods inventory does not affect the amount of fixed costs expensed.
AACSB: Analytic AICPA FN: Reporting Bloom's: Remember Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Easy Topic: The Decision Process
68. When the balance in ending finished goods inventory increases, net income under absorption costing A. is lower than under direct costing. B. is higher than under direct costing. C. is the same under direct costing. D. is unaffected by the increase.
AACSB: Analytic AICPA FN: Reporting Bloom's: Understand Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Easy Topic: The Decision Process
69. Which of the following should NOT be a consideration when deciding whether to make or buy a part? A. differential fixed costs B. opportunity costs C. sunk costs D. capacity costs
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 30-05c Deciding whether to make or to buy a part. Level: Easy Topic: Cost-Revenue Analysis
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70. Which of the following should NOT be a consideration when deciding whether to make or buy a part? A. impact on quality of the part under each set of circumstances B. impact on factory employee morale C. impact on continued supply of the part D. impact on sales to existing customers
AACSB: Analytic AICPA FN: Decision Making Bloom's: Understand Learning Objective: 30-05c Deciding whether to make or to buy a part. Level: Easy Topic: Cost-Revenue Analysis
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Short Answer Questions
71. Data for a firm's first year of operation is given below. The firm uses absorption costing.
1. What is the cost of goods manufactured for the year? 2. What is the ending inventory of finished goods? 3. What is the cost of goods sold? 4. What is the net income (loss) for the year? 1. $270,000; 2. $45,000; 3. $225,000; 4. $5,000. Feedback: 1. (6000 x 30) + 90000. 2. ((90000/6000) + 30) x 1000. 3. ((90000/6000) + 30) x 5000. 4. ((75 - 30 - 16 - (90000/6000)) x 5000) - 65000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Medium Topic: The Decision Process
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72. Data for a firm's first year of operation is given below. The firm uses direct costing.
1. What is the ending inventory of finished goods? 2. What is the cost of goods sold? 3. What is the manufacturing margin for the year? 4. What is the net income (loss) for the year? 1. $30,000; 2. $150,000; 3. $225,000; 4. ($10,000). Feedback: 1. (1000 x 30). 2. 5000 x 30. 3. (75 - 30) x 5000. 4. ((75 - 30 - 16) x 5000) - 65000 - 90000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Medium Topic: The Decision Process
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73. Assume that the Venus Company, which now sells its product for $75 per unit, has an opportunity to sell 3,000 units in a foreign country for $54 a unit. The order will not affect its current domestic sales. Shipping costs of $9 a unit would be incurred on the order. Current variable manufacturing costs are $31 per unit manufactured. Variable selling and administrative costs are $14 per unit sold. Included in variable selling expenses is a sales commission of $1 per unit, which would not apply to the special order. Fixed manufacturing costs are $75,000 per year and fixed selling and administrative expenses are $45,000 per year. The company is now manufacturing and selling 5,000 units per year. 1. Should the Venus Company take the order? 2. What impact would the special order have on profits? 1. Yes; 2. The order would provide an estimated additional profit of $3,000.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-05a Pricing products in special cases. Level: Medium Topic: Cost-Revenue Analysis
74. The Sloan Corporation is considering the purchase of a new factory machine at a cost of $30,000. The machine would perform a function that is now being performed by hand. The new machine would have a life of five years and would produce 5,000 units a year (the current output). Direct labor costs would be reduced by $1.10 a unit. Variable overhead costs would be reduced by $0.35 a unit. Fixed costs, other than depreciation, would increase by $2,500 a year. 1. Should the machine be purchased? 2. What impact would the decision have on net income? 1. No; 2. Purchasing the machine would decrease net income by $1,250 per year.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-05b Deciding whether to purchase new equipment. Level: Medium Topic: Cost-Revenue Analysis
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The data given below pertains to the operations of the Newton Products Corporation for the year ended December 31, 2013
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75. Based on the information given prepare an income statement for the year using the absorption costing approach. Assume that the beginning finished goods inventory had a cost of $35 per unit.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Medium Topic: The Decision Process
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76. Based on the information given prepare an income statement for the year using the direct costing approach. Assume that the beginning finished goods inventory had a cost of $25 per unit.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Medium Topic: The Decision Process
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77. The data given below is taken from the budgeted income statement of the Arrow Corporation for 2013. It shows the projected net income or loss for each of the firm's three products. Management is concerned about the budgeted loss for Product C and wants to discontinue it. Prepare an analysis indicating the effects of discontinuing Product C. Based on the analysis, indicate the decision that should be made.
Additional information: (a.) Materials and labor are variable costs. (b.) Total manufacturing overhead is applied at 50 percent of the direct labor costs. (c.) Variable overhead is 10 percent of the direct labor costs. (d.) Fixed overhead totals $11,600 a year. (e.) Operating expenses include variable costs at 20 percent of sales dollars. (f.) Fixed operating expenses total $18,000. (g.) Fixed overhead costs and fixed operating expenses are expected to continue if Product C is eliminated.
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Decision: The analysis indicates that discontinuing Product C will reduce net income by $5,400 ($34,500 - $29,100). Therefore, Product C should not be discontinued.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 30-01 Explain the basic steps in the decision-making process. Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Level: Medium Topic: The Decision Process
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78. The Alvarado Equipment Corporation is currently manufacturing a part that goes into its main product. Each year 2,500 of these parts are used. Cost data for the past year that relates to the 2,500 parts is given below. Fixed costs are allocated on the basis of direct labor hours. An outside company has offered to supply the part for $45 a unit, plus a shipping charge of $2 a unit. The plant capacity now used by Alvarado to manufacture the part would not be used within the foreseeable future if the part is purchased outside.
Prepare an analysis comparing the unit cost of manufacturing the part with the unit cost of purchasing it. Based on the analysis, indicate the decision that should be made.
Decision: The analysis indicates a savings of $4.00 per unit if the part is purchased rather than manufactured. Therefore, the part should be purchased.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 30-05c Deciding whether to make or to buy a part. Level: Medium Topic: Cost-Revenue Analysis
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79. The following information relates to a one-time special order from a flood relief organization for 200 of its book bags at $8.50. Current manufacturing costs are as follows.
Fixed manufacturing overhead is based on capacity of 4,500 units per year. Normal sales are 4,000 book bags per year. Only $0.46 of the selling costs will be incurred for this special order. What are the relevant costs regarding this special order? Pose one nonfinancial consideration regarding the acceptance or rejection of this special offer. Relevant costs are the variable costs which total $8.46. Additional questions include whether sales to current customers would be jeopardized, and whether orders to current customers would be delayed causing potential customer relation problems. In addition, the company needs to determine whether federal laws would be violated.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 30-05a Pricing products in special cases. Level: Medium Topic: Cost-Revenue Analysis
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80. The following information relates to the purchase of new machine being considered.
The new machine would enable the company to make 13,500 units per year. The current capacity of 12,000 is based on the maximum number of units that the old machine can produce. The company has had to turn down orders in the past few years due to this limit on capacity and estimates that it can sell as many of the product as it can produce. The sales price per unit of the product is $34.50. Determine the relevant data. Pose one addition consideration regarding this decision.
Income will be $375 less with the new machine. Considerations are when a new machine might have to be purchased anyway, whether the employee morale might be affected because the reduced labor cost may have meant laying off an employee, whether the quality of the product with the new machine might be better (or poorer), and whether capacity could possibly be increased even more. Since the difference is so little and because the costs are all estimates, all projections have to be more closely analyzed.
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AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 30-05b Deciding whether to purchase new equipment. Level: Medium Topic: Cost-Revenue Analysis
81. Companies often consider buying the parts for the products they make or making the parts they buy. List the factors management should consider when looking into making a part they have been purchasing. 1) Will the quality be the same? 2) Will the parts be available as needed? 3) Will the increased use of the facilities interfere with current activities in the factory? (capacity issue) 4) Can the company produce the number of parts needed to meet expected production of the product? (capacity issue) 5) Would the supplier consider selling them the product at a lower price?
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 30-05c Deciding whether to make or to buy a part. Level: Medium Topic: Cost-Revenue Analysis
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82. Tyro Manufacturing has a machine that requires frequent repairs. Production is stopped and as a result some shipment dates have not been met. The manager read in their industry's trade magazine about a new machine that has just been developed. Using the given headings, list the six steps of the decision making process. Relate each of the first five to this specific situation using the format provided.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 30-01 Explain the basic steps in the decision-making process. Level: Hard Topic: The Decision Process
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83. McAdd Industries is considering whether to continue making part MPG 411 or buying the part from a supplier. The supplier can sell the needed number of parts (47,000 projected) to McAdd for an amount that is above the company's current cost to manufacture it. If McAdd decides to purchase the parts from its supplier, it will be able to reconfigure the manufacturing floor in order to allow increased production of 50 of its product for an increased contribution margin of $17,000 for the year. The old machine has a book value of $39,000, and can be sold for $4,000. Discuss this situation. What are the considerations? The student should mention the following. Any other considerations mentioned should be looked at for logic and relevance.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Level: Hard Topic: The Decision Process
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84. Using the given information, determine the income under both the absorption and the direct (variable) costing methods for CRL Company this year. Explain the difference, if any.
CRL Company income under absorption costing is $125,730 and under direct costing it is $119,080. The difference is the $4.75 per unit fixed manufacturing cost times the 1,400 units in ending inventory ($6,650) that is in ending inventory and not on the income statement under absorption costing.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Medium Topic: The Decision Process
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85. Using the given information, determine the income under both the absorption and the direct (variable) costing methods for the company for the year. Explain the difference, if any.
The company's income under absorption costing is $128,050 and under direct costing it is $118,050. The difference is the $5.00 per unit fixed manufacturing cost times the 2,000 units in ending inventory ($10,000) that is in ending inventory and reflected on the Balance Sheet and not on the Income Statement under absorption costing.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Apply Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Level: Medium Topic: The Decision Process
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86. Analyze the following divisions of Johannes' Clothing Company. Management has to make a decision whether to close one of the divisions or keep both open. Make a recommendation to management based on the information given. Of the fixed costs, parts are controllable within the divisions, but $31,000 of the total are company headquarters fixed costs. Of these, $16,000 are allocated to the Skirt Division and $15,000 to the Shirt Division.
Both divisions have positive contribution margins. The Shirt Division has a loss of $3,400 when all costs are considered. The contribution margin of $31,900 for the Shirt Division is greater than its controllable fixed costs of $20,300 resulting in a segment margin of $11,600. Therefore it should be kept open. The company's general fixed costs of $15,000 allocated to it will continue even if the Shirt Division were to be closed creating a total net loss of $12,290 for Naff Clothing Company.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Level: Medium Topic: The Decision Process
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87. Nabob Corporation is considering expanding into the Midwest. It is estimated that this new division would generate an average of $378,000 in sales per year. The variable manufacturing costs would be $187,000, variable selling costs would be $72,000, and controllable fixed costs would be $90,000. In addition, the company planned to allocate $85,000 of company common fixed costs to the new division. Is this a wise decision for Nabob Corporation? Why? Yes, the company should open this division. The contribution margin generated by the new division given the estimates given is $119,000, a figure which is more than the controllable fixed costs of $90,000, leaving $29,000 to help alleviate general corporate costs.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Level: Hard Topic: The Decision Process
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88. Bianca Jewel Box Manufacturing received an offer from a nonprofit organization for a one-time purchase of 2,000 of its Model RYA18261 at $20 each for distribution to flood victims in the South. Full capacity at Bianca is 25,000 units. Bianca currently expects to make 20,000 units in the current year and based all estimates on that expectation. There will be no delivery costs for this special order. The average costs to Bianca to produce one Model RYA18261 are $27 each as shown.
Should Bianca accept this special offer? Explain your decision. Total variable costs are $17. Therefore, if they sell the Model RYA18261 at $20, they cover variable costs. The fixed costs are irrelevant to the decision as they will not change. Bianca has the capacity to fulfill the order without creating any problems with its regular customers regarding delays or unfilled orders. Also, the nonprofit organization is not in competition with their customers for sales. Thus, Bianca should accept the offer.
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Analyze Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Learning Objective: 30-05a Pricing products in special cases. Level: Medium Topic: Cost-Revenue Analysis Topic: The Decision Process
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89. The Lourdes Corporation manufactures fans. A newly-formed construction company in the area desires to buy up to 300 of their Model CSB3192 this year. Lourdes quoted them a price of $67 which covers all costs plus markon. The construction company has indicated that they will buy all the fans they need in the future from Lourdes Corporation if Lourdes will sell the fans for $60 each. Lourdes Corporation has the capacity to make the 300 fans above their usual production needs. Currently, Lourdes ships all of their production to companies in other parts of the country, but do not usually sell any locally. If the $60 offer covers all costs and allows a small markon, what other things should Lourdes consider before coming to a final decision? Lourdes should consider the possibility that a newly formed company may not stay in business. Also, they have not yet established a strong credit rating of any kind. Collection may be a problem. Probably, existing customers will not be affected by the local construction company, but they may hear about the lower price and demand the same price. Also, Lourdes needs to determine whether this deal infringes on any laws in any way. Will future needs exceed Lourdes' capacity?
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Evaluate Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Learning Objective: 30-05a Pricing products in special cases. Level: Hard Topic: Cost-Revenue Analysis Topic: The Decision Process
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Matching Questions
90. Match the following descriptions with the appropriate term.
1. Sales minus the variable cost of goods sold 2. The difference in cost between one alternative and another 3. The manufacturing margin minus variable operating expenses 4. A cost that has been incurred and will not change as a result of a decision 5. Costs not directly traceable to a specific segment of a business 6. Costs that the segment manager can control 7. The accounting procedure whereby only variable costs are included in the cost of goods manufactured, and fixed manufacturing costs are written off as expenses in the period in which they are incurred 8. Revenues minus variable costs 9. The accounting procedure whereby all manufacturing costs, including fixed costs, are included in the cost of goods manufactured 10. Potential earnings or benefits that are given up because a certain course of action is taken
Controllable fixed costs 6 Manufacturing margin 1 Sunk cost 4 Absorption costing 9 Opportunity cost 10 Differential cost 2
Marginal income 3 Common costs 5
Direct costing 7 Contribution margin 8
AACSB: Analytic AICPA BB: Critical Thinking Bloom's: Remember Learning Objective: 30-01 Explain the basic steps in the decision-making process. Learning Objective: 30-02 Prepare income statements using the absorption costing and direct costing methods. Learning Objective: 30-03 Using the contribution approach; analyze the profits of segments of a business. Learning Objective: 30-04 Determine relevant cost and revenue data for decision-making purposes. Learning Objective: 30-05a Pricing products in special cases. Learning Objective: 30-05b Deciding whether to purchase new equipment. Learning Objective: 30-05c Deciding whether to make or to buy a part. Learning Objective: 30-06 Define the accounting terms new to this chapter. Level: Easy Topic: Cost-Revenue Analysis Topic: The Decision Process
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